06.12.14

Motor Voters. The Detroit General Retirement System board, the Motor City’s largest single creditor (Detroit claimed more than 100,000 creditors in 17 classes in filing Chapter 9 bankruptcy last July, but the general system emerged as its largest single creditor, with a claim of just over $2 billion in pleadings.), yesterday voted 5-2 to endorse Detroit’s bankruptcy plan of adjustment, and the Board urged its member retirees to affirm the plan to prevent much steeper cuts to pensions—with ballots due by July 11th: “The GRS board took action for favorable support of the (plan) after careful review and consideration of reports and recommendations from its restructuring/bankruptcy team of attorneys and financial advisers….(The current) Plan of Adjustment (the ‘POA’) represents the best interests of Retirement System members and beneficiaries and further represents the best and most prudent option for maximizing the preservation of retirement benefits for the plan members and beneficiaries…Under the city’s proposed $18 billion debt plan of adjustment, general city retirees face a base pension cut of 4.5 percent if they approve Emergency Manager Kevyn Orr’s debt-cutting plan, but a 27 percent reduction if they reject it. The board of the retirement system, which provides benefits to most of Detroit’s more 21,000-plus retired city employees, expects to issue a letter to non-uniform retirees next week, with its reasons for supporting the plan. The General Retirement plan differs from the Retired Detroit Police and Fire Fighters Association plan, whose 6,500 members include more than 80 percent of police and fire pensioners in the separate Police and Fire Retirement System, who had previously reached a separate agreement in mediation with the city last April—in an agreement which provides for no benefits cuts to police and fire pensioners (although it would reduce the annual COLA from 2.25 percent to 1 percent.), who are not eligible for Social Security benefits in retirement, while the general system deal calls for a 4.5 percent reduction in monthly benefits and forgoes cost of living allowances. Representatives of retirees and current city employees have said they would drop a legal challenge to the city’s bankruptcy case at the 6th Circuit U.S. Court of Appeals — if the state and private foundations committed a contribution to shore up the two city pension plans. The General Retirement System board joins several union and bond holders who have approved the plan, including the Detroit Retired City Employees Association, Retired Detroit Police and Fire Fighters Association, Official Committee of Retirees, Detroit Police Command Officers Association and Detroit Police Lieutenants and Sergeants Association.

Nevertheless, the decision will not be easy—and, as state leaders warned system voters yesterday, much is at stake. Michigan Governor Rick Snyder has said if either of the two classes of pensioners rejects the plan, the nearly $820 million grand bargain — a pool of private money and state aid — will be off the table. That pot, composed of some $195 million in state tax dollars with $466 million in private funds to prevent pensioners from facing double-digit percentage reductions in their monthly lifetime benefits―would more than offset the plan of adjustment’s proposed savings of up to $239 million from GRS retirees who had active annuity savings fund accounts between July 2003 and June 2013. Moreover, in addition to the so-called Grand Bargain $820 million, another $56 million in income stabilization funds to ensure pensioners do not fall below the poverty line is expected to be added, Chief U.S. District Judge Gerald Rosen, who serves as the lead mediator between Detroit and its creditors, said earlier this week at the Detroit Institute of Arts when the General Motors and Ford announced they were adding an additional $26 million in grants—in addition to the growing commitments mentioned by DIA Chairman Eugene Gargaro, who noted that the DIA has tentative commitments for about 70 percent of its $100 million pledge to the “grand bargain”― the municipal finance piece de resistance to shore up Detroit pension funds and spin off the museum from the city to protect its artwork. Nevertheless, the trustees and retirees still confront painful choices—with one telling the Detroit News yesterday: “If this was just impacting myself and my family, I might want to take the risk and pursue litigation… (But) I cannot risk the pensions of thousands of current and future employees and retirees, especially those who have not come to us voicing an opinion.” In contrast, retiree Cecily McClellan urged the board to reject the plan, saying it’s not a grand bargain: “It is a grand theft. It is a grand larceny…There are (other) options here. We think people should come before art. What little I have in a pension shouldn’t be taken away.” Trustee Lou Hatty said he did not want pensioners left out in the cold: “I don’t like it. (But) I cannot leave unprotected, and that’s what would have happened with a no vote.”

Oyez! U.S. Bankruptcy Judge Steven Rhodes yesterday ordered the Motor City to meet with its limited-tax general obligation (LTGO) bondholders to try to reach a settlement after months of failed talks, instructing the city and Blackrock Financial Management and Ambac Assurance Corp. into mediation beginning today—the 4th such federal court-ordered mediation session for the two parties. The LTGO holders are among a few remaining major financial creditors who have not yet reached a settlement with the city. The three insurers who wrap the city’s unlimited-tax GO bonds reached a settlement that calls for a 74% recovery. Ambac, last month, filed a challenge to the Motor City’s plan of debt adjustment, which was joined by Blackrock. The two are challenging Mr. Orr’s proposed repayment to LTGO holders of about 10 to 13 cents on the dollar―among the lowest recovery offered to any creditor under Kevyn Orr’s proposed plan of adjustment. The challenge here is unique, for, if there is no settlement, it would mark the first time that a federal bankruptcy court had ever considered or ruled on the status of limited-tax general obligation bonds. Ambac insures about $93 million of the $163 million of Detroit LTGOs that are not secured by a lien on state aid. Despite the small size of the debt relative to the Detroit bankruptcy case, the stakes are high for the insurer because the final treatment, determined either in a settlement or a ruling, could become a precedent for other state and local recovery plans.

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