One More Lap. Detroit Chief Financial Officer John Hill yesterday, speaking at a conference in the Windy City, warned that the Motor City’s post-bankruptcy future is “absolutely critical and that right now is a big question mark.” That is, as the outlines of a final plan of adjustment that would permit U.S. Bankruptcy Judge Steven Rhodes to approve the city’s exit from the largest municipal bankruptcy in U.S. history as early as October 1st looms, both Judge Rhodes and city leaders are beginning to focus on the State and Local Trend Gap—and what it will take for Detroit to realize a sustainable future. Judge Rhodes, in the wake of his appointments Monday of two fiscal experts, is clearly concerned; Governor Rick Snyder has mentioned the possibility of a control board similar to one used for New York City’s fiscal crisis in the 1970s—conveniently with Judge Rhodes’ selection this week of former New York Lieutenant Governor Richard Ravitch, who played a critical role in preventing New York City from seeking federal bankruptcy protection and recovering. The issue and timing are receiving increasing focus, because the City Council has the option of asking Emergency manager Kevyn Orr to leave at the end of September. Under Michigan’s emergency law, the Governor has the option to name a replacement, but how that conforms to the transition back to local control will be a challenge—or, as Mr. Hill noted yesterday, it will be important for the Motor City’s elected officials to participate in reforms, after all, they will be responsible for executing the debt adjustment plan once it wins federal court approval and the emergency manager departs. The post-Orr future is becoming more critical as Mr. Orr readies a fourth revision of his proposed plan of adjustment for submission to U.S. Bankruptcy Judge Rhodes tomorrow—with a hearing on the plan scheduled for Monday on final approval.
The Fine Art of Municipal Bankruptcy. A unique but critical element of Detroit’s ability to emerge from municipal bankruptcy revolves around the unique proposal to inject more than $800 million into the plan to prevent any retirees from falling below the federal poverty level and the protect and provide for the independence of the world-renowned Detroit Institute of Art—with the funds coming from foundations and an appropriation from the Michigan legislature supported by Governor Rick Snyder and bipartisan leaders. But a snag – with time running out for this session – has emerged: House Speaker Jase Bolger has warned that absent contributions from the city’s unions, the Legislature will act on the state’s proposed $350-million contribution. The last minute snag, different than what Senate Majority Leader Randy Richardville (R-Monroe) and Gov. Rick Snyder’s positions are and have been now threatens a critical building block to the city’s ability to successfully emerge from municipal bankruptcy—the to contribute the money to help settle the city’s historic bankruptcy. Different foundations have pledged $466 million toward the settlement, the DIA $100 million, and Gov. Snyder has proposed the state contribute $350 million over 20 years, likely from a state fund created from a $250-million-a-year settlement with tobacco companies. Governor Snyder yesterday said: “We’re seeing very constructive progress on people coming to agreements…A settlement would be by far the best answer, so hopefully we can all work towards that.” The fly in the ointment comes at a particularly critical point—with both the U.S. Treasury Secretary in Detroit today and tomorrow, the Legislature nearing the end of its session, and the unions refusing to agree to the emerging plan of adjustment until the state contribution is in hand. The pension boards representing police and firefighters and general city employees voted last week to accept the basic economic proposals in the latest bankruptcy plan, under which police and fire retirees would suffer no cuts to their monthly checks but lose some of their cost-of-living adjustments. Retirees of the General Retirement System would see their monthly checks cut by 4.5%
Pothole Ahead. Even as there appears to be a building crescendo towards an agreement that could lead to a successful court approval for exit from bankruptcy, the potential snag in Lansing (please see above) and a new proposal by Mr. Orr to reclaim some $239 million in interest payments made to the city’s General Retirement System threaten the applecart. Union members are apprehensive the $239 million take-back would adversely impact as many as 4,800 retired workers—retirees who have already agreed to baseline pension cuts of 4.5 percent. The fear is that the additional givebacks could entirely eliminate some retirees’ pensions. Mr. Orr’s plan proposes to reclaim $239 million in interest payments made by the General Retirement System to the annuity accounts of workers during a 10-year window, because the system’s actual investment gains did not justify the payments. Carole Neville, an attorney for the Official Committee of Retirees, yesterday warned that should Mr. Orr opt to pursue efforts to reclaim Annuity Savings Fund monies already paid out, that action could be a “deal breaker.” The Emergency Manager’s concern is that the system’s claimed interest earnings were excessive, thereby adversely affecting the sustainability and accountability of the city’s General Retirement System—a key factor in forcing the Motor City into insolvency. The Detroit News reports that Detroit city attorney Bruce Bennett disclosed in federal court last week that the city is seeking to recoup the $239 million through an exhaustive retiree-by-retiree assessment of interest payments by the pension fund. But, as Ms. Neville noted, the amounts could vary greatly among 4,774 affected retirees, depending on the highest amount in their annuity account. Mr. Bennett’s request, which spans the period from July 1, 2003, through June 30th last year would reclaim “excess” annuity funds credited to an unknown number of current workers’ accounts—so that retirees who had annuity funds could be confronted with an additional average cut of 9 percent in their monthly pensions. Some 1,500 retirees could experience cuts all the way from 10 percent to 100 percent, according to an actuarial analysis conducted by the retiree committee’s financial consultants, with, according to actuarial data provided to the News, some 50 city retirees at risk of losing their entire monthly pension check after the base 4.5 percent cut and elimination of an annual cost-of-living allowance in the city’s proposed plan of adjustment. Ms. Neville told the News that 5,284 former city workers who either retired before July 2003 or did not contribute to the optional annuity savings plan would not be affected, while the learned Jim Spiotto said the city may be pursuing the “clawback” to draw public attention to the pension board’s past practices in an effort to negotiate different concession in negotiations: “They don’t want to upset either agreements that they already have with the retirees and workers…Bankruptcy to a large degree is like ‘Let’s Make A Deal.’ ”