05.12.14

Voting for the Checkered Flag. Today marks the first day of a 60-day window for the Motor City to solicit votes from an estimated 67,000 creditors on its proposed plan of adjustment, with packets going out today to some 32,000 vested pensioners that will include letters of support from the Retired Detroit Police and Fire Fighters Association and the Detroit Retired City Employees Association. Indeed, it will be a busy week, with U.S. Bankruptcy Judge Steven Rhodes scheduled to convene a hearing today on all remaining disputes over documents creditors are seeking from the city and suburban counties for evidence to be used at a late July trial over the feasibility of Detroit’s reorganization plan.  Tomorrow, Emergency Manager Kevyn Orr is scheduled to testify at a hearing at the state Capitol in Lansing before a special House committee considering the 11-bill, $194.8 million so-called “grand bargain” package in state aid for Detroit’s pension funds—a two-day hearing before the legislature’s House Committee on Detroit’s Recovery and Michigan’s Future. Back in Detroit, Judge Rhodes has scheduled a hearing for Thursday morning on motions from bond insurer Financial Guaranty Insurance Co. (FGIC) and European banks to intervene in a lawsuit the city filed seeking to repudiate $1.4 billion in troubled pension-related debt. The judge also will hold a hearing on FGIC’s motion to allow interested bidders to examine art at the Detroit Institute of Arts. The outcome is not only uncertain, but even the underlying proposal could change. The trustees of city’s two pension funds remain sharply divided with both the Emergency Manager and state officials over future control of the multibillion-dollar funds, especially the police and firefighters’ board, which oppose the proposals from Emergency Manager Kevyn Orr and Michigan legislators to remove the bulk of their management decision-making authority over $6 billion in assets. Under the so-called “grand bargain package” legislation introduced in Lansing last week, the state’s proposed $195 million appropriation to buck up the pension funds would create new investment committees to hire and fire financial and investment advisers, effectively stripping that power from the pension boards: the committees would be dominated by independent members with financial and investment expertise who are not city employees or retirees. A second part of the package would replace traditional defined benefit plans for future employees after new five-year contracts expire and offer instead 401(k) defined contribution plans — a stipulation that has not been proposed by the city. Mr. Orr has proposed maintaining defined benefits with employee contributions through a hybrid pension. Under that plan, nearly 12,000 retired and active duty police officers and firefighters would receive no base cut in their pensions, but a COLA cut from the 2.25 percent annual cost-of-living allowance increase to about 1 percent. If members reject the plan as Class 10, the city, however, is proposing to eliminate the COLA altogether. (Class 10 represents 11,977 police and fire pensioners, while Class 11 comprises 20,280 retired and current city workers in the General Retirement System.) According to the Detroit News, Donald Taylor, president of the retired police and firefighters group, said a “yes” vote represents “the best protection of our pension and other benefits that could be obtained….The treatment of police and fire fighter retirees has improved significantly since the onset of the bankruptcy and is materially better if classes 10 and 11 approve the plan.” The General Retirement System’s board is scheduled to meet Wednesday to review a draft letter of support for the city’s plan, spokeswoman Tina Bassett said, after the system’s trustees last month voted unanimously to endorse a 4.5 percent pension cut for retirees and the elimination of the annual cost-of-living allowance for its members if they vote yes on the plan. If they vote no, GRS members would be faced with a 27 percent base cut in their pension and elimination of their COLA.

First in Bankruptcy Budget. The Motor City now has its first budget since the city filed for bankruptcy last year—although not a budget proposed and adopted by the city council, but rather a budget provided by the city’s emergency manager, Kevyn Orr. Rather than be subject to the normal process of citizen input and amendment, and amendments and voting by council, the final decision on this budget will be by a federal court. Under the budget, which is in keeping with the city’s plan of adjustment submitted to the federal bankruptcy court, the city proposes to spend under $1 billion annually from its general fund over each of the of the next three years. According to Mr. Orr’s spokesperson: “The budget presented is balanced and modest…It allows the city to provide basic public services to its residents and to make additional investments where needed.” Under the budget, many city departments will realize budget cuts, but Mayor Mike Duggan’s office would see more than a 100 percent increase, and the City Council would also see a bump from the current $5.5 million to $7 million annually.  The budget assumed $959 million in general fund revenue in the current fiscal year, which ends June 30, including the $120-million loan approved last month by Judge Rhodes to help pay for city services. While this year’s budget resulted in general fund spending came of about $996 million, Mr. Orr has proposed significant reductions over the next three years: $937 million, $922 million, and $927 million, respectively, in general fund spending, with compensation rising gradually from $341 million this year to about $351 million in 2016-17, and significant cuts in the police and fire departments’ general fund budgets, albeit, Mr. Orr is proposing that their operations will be supplemented by the $120 million from the so-called $120 million “quality of life loan,” with the police department’s general fund budget reduced by nearly one third to $262 million next year, compared with $359 million this year, and the Fire Department’s from about $176 million this year down to $112 in general fund dollars next year.

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