Detroit’s bankruptcy exit plan includes pension cuts, millions for blight removal, technology

Feb. 22--Detroit's comprehensive bankruptcy reorganization blueprint calls for shedding billions of dollars in debt, spending more than $500 million for blight removal and investing $1 billion to improve city services.

The city's Chapter 9 bankruptcy plan of adjustment -- filed Friday in U.S. Bankruptcy Court -- details offers to more than 100,000 creditors, and a disclosure statement reveals emergency manager Kevyn Orr's plan to reshape the city's bureaucracy.

The documents illuminate a potential path to resolve the city's bankruptcy, paving the way for the city to dramatically reduce an estimated $18 billion in debt and liabilities.

The city will continue negotiations with creditors in a bid to reach a consensual restructuring plan, which must be approved by Judge Steven Rhodes. That means the plan could change significantly before it is approved.

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The city's goal is to pay less money to Wall Street, retirees and bondholders -- which collectively receive about 4 in 10 of the city's sparse general fund dollars -- and to invest about $1.5 billion over 10 years to ramp up public safety, improve city services and reduce blight.

But also keeping close tabs on details of Orr's plan are retirees, many of whom survive on city pensions earned years ago.

Orr proposes 34% cuts to the pension checks of general city retirees and 10% to police and fire retirees, levels he called "very fair."

But those cuts would be reduced to 26% and 4%, respectively if the city's two independently controlled pension boards agree to support the plan of adjustment. The city has about 24,000 retirees.

The city proposed paying secured bondholders 100% of what they're owed, while unsecured general obligation bondholders would receive 20%.

"We think our plan is reasonable, we think it is feasible," Orr said in a conference call Friday from Philadelphia with journalists from across the country. "There are 700,000 residents who deserve an adequate level of services."

The city proposed paying about 20% to 30% of its retiree health care liabilities to a newly created trust fund called a VEBA, or Voluntary Employees' Beneficiary Association, which would manage insurance benefits. Orr proposed contributing $526.5 million over 20 years to the fund.

The city's two pension funds -- the General Retirement System and the Police and Fire Retirement System -- released statements deriding Orr's plan as unnecessarily harsh on pensioners.

"We believe the City of Detroit can afford much better treatment of its pension beneficiaries who dedicated years of their lives in service of the city," said Bruce Babiarz, a spokesman for Detroit's police and fire pension board. "We believe there are reasonable and viable options that could negate the need for drastic pension cuts."

American Federation of State, County and Municipal Employees Council 25 President Al Garrett, who represents the city's largest employee union, promised to fight Orr's restructuring plan.

"The proposed plan of adjustment is a gut punch to Detroit city workers and retirees," Garrett said. "The plan essentially eliminates health care benefits for retirees and drastically cuts earned pension benefits. Retirees cannot survive these huge cuts to the pensions they earned. The plan is unfair and unacceptable."

Orr blamed poor investment strategies and a pattern of excessive bonuses -- called 13th checks -- for underfunding the city's pension funds and making cuts necessary. He also called for restitution of some of those excess payments -- likely in the form of higher cuts in future checks.

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Orr, who as Washington, D.C., bankruptcy attorney was appointed emergency manager by the state in March, is betting that pensioners will eventually agree to a reduced level of cuts, following the emergence of a potential grand bargain in which several nonprofit foundations and the state of Michigan would provide funds to reduce pension cuts and preserve the Detroit Institute of Arts.

Foundations have pledged $365 million; the DIA has agreed to raise $100 million; and Lansing may contribute $350 million over 20 years.

Without a deal, pensioners could try to pursue a liquidation of the DIA's art -- worth hundreds of millions of dollars -- while the city could try to force the implementation of the restructuring plan through a court process called a "cram down."

"I don't know how anyone can walk away from a billion dollars that we didn't have a month ago," Orr said. "We really do not have time for a lot of acrimony and litigation."

Court hearings

Friday's filings pave the way for a contentious round of court hearings over Detroit's restructuring plan, which is likely to be altered as the city continues negotiations with creditors.

As expected, the city proposed higher payouts for its 24,000 retired pensioners than other unsecured creditors, in part because of the grand bargain.

A coalition of powerful bond insurers said Detroit should evaluate the DIA's entire collection for sale and criticized the city's plan that favors pensioners over bondholders.

"While we understand that favoring pensioners and discriminating against bondholders and other creditors might be politically popular, we believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the City's emergence from bankruptcy," Steve Spencer, an adviser to Financial Guaranty Insurance, said in a statement.

Orr said: "For 30 years, I've been doing restructuring, and I've never entered a case where any unsecured creditor thought that their cut was fair."

Jones Day attorney David Heiman, one of Detroit's lead bankruptcy lawyers, said bankruptcy law allows unsecured creditors to receive different payouts. He also said that the grand bargain would allow the city to pay more to financial creditors.

Too much for services?

In their fight for a greater share of the pie, creditors may seek to block Orr's proposal to invest $1.5 billion in city services.

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Among the improvements the city plans is $520 million to remove blight over six years. With that cash, the city would demolish about 450 abandoned homes per week, up from a weekly pace of 114 in a city with an estimated 78,000 unsalvagable structures.

Blight is one of many factors that contributes to Detroit's extraordinarily high violent crime rate and low property values.

Fresh investments also include $148 million to rehab Detroit's antiquated information technology system and $447 million on major capital improvements, including the city's vehicle fleet and facilities for police and fire services and the city's recreation department.

Over the next five years, the plan would devote $114 million in increased funding for the Police Department and $82 million for the Fire Department.

The documents call for "significant modifications" to union contracts, compensation and work rules for active employees. The city said it would consider outsourcing some services.

"However, the potential for reductions in wages and salaries must be balanced against likely reductions in benefits and the City's need to attract and retain skilled workers," according to the disclosure statement.

The city had more than $246 million in uncollected taxes and fees as of 2011 -- and it is pursuing actions to increase its collection rates.

Judge Rhodes has firmly emphasized that the plan must be "feasible" and must improve people's lives while also treating creditors fairly.

He has said "profound change" may be necessary in pension and health care benefits, has cautioned against one-time fixes and has urged the state of Michigan to contribute to the bankruptcy settlement.

Republican Gov. Rick Snyder, who appointed Orr, said that securing $350 million in state funding to reduce pension cuts and spin off the DIA is a work in progress. He will have to convince state legislators to sign off, but Republicans are sensitive to the prospect of a Detroit bailout.

"Detroit's comeback is under way," Snyder said in a statement. "Kevyn Orr has submitted a thoughtful, comprehensive blueprint directing the city back to solid financial ground, a crucial step toward a fully revitalized Detroit."

Snyder added: "There will be difficult decisions and challenges for all sides as this process moves forward. The state's focus is on protecting and minimizing the impact on retirees, especially those on fixed, limited incomes, restoring and improving essential services for all 700,000 Detroit residents and building a foundation for the city's long-term financial stability and economic growth."

Wayne State University bankruptcy law professor Laura Beth Bartell said the bankruptcy restructuring may hinge on the grand bargain moving forward.

"The grand bargain is at the center of this. That's the source for virtually all the funds for the pensioners," she said.

Missing from the city's proposed plan of adjustment is an agreement to a deal to spin off the Detroit Water and Sewerage Department, which the city has estimated could be worth $1.9 billion over 40 years to the city. That proposal was included in a draft plan last month.

Friday's proposal included references to the creation of the Great Lakes Water Authority.

The city is still negotiating a potential water deal, which suburban politicians have opposed.

With a deal to spin off the water department, creditors could get more, including retirees.

As part of its restructuring plan, the city said it plans to obtain $300 million in new financing as it leaves bankruptcy. The city said it will need the new financing to help operate the city and provide services.

The city previously arranged $350 million in new financing from London-based Barclays, but that credit agreement was contingent on the city's ability to settle its disastrous swaps agreement made with UBS and Merrill Lynch in 2005.

That swaps settlement has been rejected by Judge Rhodes twice. A third agreement has been reached, and details are expected in a few days when the new deal is filed in bankruptcy court. Orr said the new figure is "significantly lower" than the $165-million settlement rejected by Rhodes in January.

Separately, the city has filed a lawsuit seeking to wipe out $1.4 billion in pension debt held mostly by European banks that was issued in 2005 by Mayor Kwame Kilpatrick's administration to eliminate the city's unfunded pension liabilities.

The city argued the pension obligation certificates of participation were illegal and do not have to be paid.

Contact Matt Helms: 313-222-1450 or [email protected]. Follow him on Twitter @MattHelms. Contact Nathan Bomey: 313-223-4743 or [email protected]. Follow him on Twitter @NathanBomey.

Staff writer Mark Stryker contributed to this report.

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