One More Lap. Following perhaps the most extraordinary week of its bankruptcy, the Motor City this morning heads to federal bankruptcy court to request Judge Steven Rhodes’ certification of its electronically revised plan of adjustment and disclosure plans—both submitted last night in the wake of yesterday’s developments. Detroit will ask the federal court to find the documents to be sufficient and accurate, as well as understandable. Should the court approve, that would set the stage for a vote by the city’s 170,000+ creditors beginning on Mayday. Last night’s eleventh hour submittal came on the heels of the 7-0 vote yesterday by the board of the Detroit General Retirement System (GRS) to endorse a retirement pension agreement that would cut pension checks for non-uniformed city workers and retirees by 4.5% and eliminate cost-of-living adjustment increases to retirement benefits. The GRS pension fund will abandon its appeal to the 6th U.S. Circuit Court of Appeals challenging the constitutionality of pension cuts once terms of the agreement are settled, according to the fund’s attorney, Michael VanOverbeke: “The board recognizes that’s part of this deal…We have a constitutional provision that says your pension benefits are guaranteed and the board has to weight the fiduciary duty to challenge any ruling that’s contrary to that with what they ultimately think might be in the best interest of the plan members and the beneficiaries.” The proposed agreement is subject to a vote by the pension fund’s nearly 18,000 individual retirees and workers. In agreeing to the proposal, the board stated: “There has been a lot of uncertainty and anxiety among our members and retirees. It is our responsibility to bring to our members and retirees the best possible deal with the best possible outcome for their consideration. The motion we passed today represents progress that allows us to move forward to continue to negotiate other details for a final settlement agreement.” Trustees for the city’s other pension fund, the Police and Fire Retirement System, will meet today; the members are expected to vote on a settlement specific to Detroit’s active and retired police officers and firefighters. The Detroit Police and Fire Retirement System board could vote today whether to endorse the city’s plan to spare their pensions and cut a 2.25 percent cost-of-living allowance to about 1 percent. The cuts in COLA equate to a 9.9 percent loss in the lifetime value of a police and fire pension, according to the city’s amended plan. If police and firefighter retirees reject the settlement, their entire COLA would be eliminated — an 18 percent loss over the lifetime of a pension — but their base pension would stay the same, according to the new plan.
Since November 2012, Detroit has skipped nearly $250 million in pension payments to the police and fire and general pension funds, records show. The general pension board retirees are scheduled to meet with their bankruptcy lawyers shortly before noon today to discuss the deal in a private session. Both pension funds agreed to the creation of an advisory board that would have final say over any future investments—an agreement mayhap reflecting Kevyn Orr’s criticism of the pension funds’ poor record of investments and loaning money to businesspersons who allegedly bribed former pension officials.
The Fine Art of Municipal Bankruptcy. The Detroit News reports that the state of Michigan will provide a lump sum of $350 million if retirees approve the evolving “grand bargain” to reduce pension cuts and shield the Detroit Institute of Arts from creditors. The Governor’s office indicated the Governor would likely seek legislative approval to issue bonds to make the state’s payment toward Detroit pensions and secure the borrowing with proceeds from the $250 million annual tobacco settlement fund. The other option was for the state to earmark $17.5 million in annual payments for Detroit pensioners from the tobacco settlement fund, but the pension funds have pushed for getting the money up front. As of last night, however, “No official payment structure had been finalized.” While the Wolverine State had initially proposed paying the two pension funds about $17.5 million a year for 20 years, now that has switched: the state has agreed to pay the money up front — a move that would significantly enhance the retirement system’s financial health and make up for a omitted payments owed by Detroit, according to Bruce Babiarz, a spokesman for the Police and Fire pension fund. Over the last 18 months, the Motor City has skipped nearly $250 million in pension payments to the police and fire and general pension funds. The three-way negotiations between Gov. Rick Snyder, bipartisan state legislative leaders in Lansing, and national foundations seeking to protect the Detroit Institute of Arts (DIA) ― twelve regional and national foundations have pledged $366 million toward shoring up the city’s pension funds in exchange for shielding the art, while the DIA has pledged to raise $100 million over two decades to buy its independence from city government ― has become an integral, if artistic, element to yesterday’s breakthrough outcomes. Gov. Snyder has said he wants lawmakers to vote on the aid package next month. Kevyn Orr’s spokesperson, Bill Nowling, yesterday said the city’s ability to limit pension reductions is due in part to intense negotiations between the city and retiree groups, double-digit investment gains in city pension funds, and the emergence of an $816 million rescue fund from private foundations, the state of Michigan and donors of the Detroit Institute of Arts.
Is the Doctor in? While the Motor City’s latest offer to its retirees dramatically softens the blow to their monthly pensions, the impact on health care benefits is far more clouded—all that is clear is that there will be significantly reduced future health insurance benefits. In the third version of its plan of adjustment filed yesterday with the federal court, the Motor City acknowledged it is uncertain what kind of health care benefits retirees would get when it offloads $3.33 billion in liabilities to new trust funds: Detroit’s actual payout to new voluntary employee benefit associations (VEBAs) remains undefined in the amended plan and could be debated in Judge Rhodes’ court this morning—where Judge Rhodes had clearly instructed Kevyn Orr to submit revisions to ensure the plan was understandable—in plain English―during this morning’s hearing over the adequacy of information contained in the 677-page document to be sent to creditors May 1. In yesterday’s revised Disclosure Statement, the Motor City wrote: “It is also unknown how long the money in the Detroit VEBA trust will last, because that will depend upon the benefits to be provided.” Indeed, with the breathtaking changes over the last 48 hours that would spare Detroit’s different pension plans of the kind of drastic cuts proposed previously, the elimination of traditional retiree health insurance is likely to earn greater scrutiny from retirees in the coming weeks. As of the first of last March, the city ended coverage of retirees under age 65 and started issuing $125-$175 monthly stipends to subsidize the cost of private health plans, a reduction of up to 85 percent for some city-paid premiums.
There Are Corporations, and there are corporations…Detroit is a corporation—just like General Motors—under Michigan law. But when it comes to corporate bankruptcy, there are significant differences. Under Chrysler’s and G.M.’s Great Recession bankruptcies, both companies were able to shed pension responsibilities; now the question is arising if GM can shed much greater responsibilities: the company has filed suit in federal bankruptcy court to bar lawsuits related to tis conduct before its 2009 federally approved bankruptcy and restructuring. A hearing is set for U.S. Bankruptcy Court in New York for April 25 on whether the court has jurisdiction, as the corporation confronts about three dozen proposed class-action lawsuits related to the recall involving 2.59 million vehicles worldwide for an ignition switch defect linked to 13 deaths.GM says it faces at least 41 lawsuits in 19 U.S. district courts across the country, including in Alabama, Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Michigan, Missouri, New York, Pennsylvania, and Texas. A judicial panel is debating whether to consolidate the actions into a single court for early stages of the case. GM wants the case sent to a federal bankruptcy court. As part of GM’s bankruptcy restructuring, GM became a new company in July 2009, leaving behind liabilities for crashes and other product liability claims. In its filing, the Detroit corporation noted: “New GM did not assume the liabilities of Old GM.”
Today’s Activities: U.S. Bankruptcy Judge Steven Rhodes will hold a hearing this a.m. on the following matters in Detroit’s bankruptcy:
- A status conference on schedule for July trial on Detroit’s debt-cutting plan of adjustment;
- Unresolved creditor objections to 600-page disclosure statement to creditors detailing the plan;
- A request by Wayne County for mediation sessions with Detroit, Macomb, and Oakland counties on creation of a regional water authority;
- The City’s motion on establishing procedures for retiree voting on changes to pensions and other post-employment benefits; and
- A motion by insurers on voting procedures and rights for water and sewer bondholders.
Analysis. The seemingly breathtaking speed with which the outlines of a successful exit from the nation’s largest municipal bankruptcy in history seems to be unrolling leave us to ponder the Motor City’s future: can a city so mired in debt, with barely one-third of its former population, with disproportionate levels of poverty and violent crime really look forward to a sustainable future? In an interview with the Bond Buyer, Emergency Manager Kevyn Orr explored parts of that challenge noting that the Motor City’s ability to access the municipal debt markets in the future will be crucial to long-term success. He told the newspaper he is confident the bankruptcy process is helping to create that future access:
“Any city needs access to capital to grow and thrive. We’ve heard the concerns about access to capital, but the reality is that money is green…We’re operating on the assumption that if we do this right, and get the city’s fiscal position straight, then people who do orthodox and appropriate underwriting will get a credit-worthy obligor.”