One year into bankruptcy, a grand coalition emerges to move Detroit forward

July 13--The grand bargain to help resolve Detroit's bankruptcy has given birth to a grand coalition -- with pensioners and unions backing the city's sweeping restructuring plan, creating a previously unimaginable alliance to fight holdout financial creditors.

For the first time in ages, there's unity -- albeit perhaps not comity -- among Detroit city leaders, unions, retirees and pension funds, creating a powerful force in the legal battle to end the largest municipal bankruptcy in U.S. history.

Add in $816 million over 20 years from the State of Michigan, nonprofit foundations and Detroit Institute of Arts donors, and you've got a broad coalition pushing for the city's revitalization.

With last-minute votes still being tabulated this weekend, pensioners appeared to have backed Detroit's bankruptcy blueprint, putting the Motor City on the doorstep of a financial transformation designed to improve the lives of residents.

The idea that Detroit could exit bankruptcy as soon as October -- only 15 months after filing -- now seems more a realistic opportunity than just hopeful optimism.

The vote clears the way for the city to ask U.S. Bankruptcy Judge Steven Rhodes to approve pension cuts and allow the DIA to spin off as an independent institution, protecting the museum from any potential sale of art to pay debts.

Doug Bernstein -- a metro Detroit bankruptcy lawyer representing the foundations that pledged $466 million over 20 years toward the grand bargain to reduce pension cuts and preserve the museum -- called the progress "absolutely remarkable."

The beginning of the end

But it's not over yet. Rhodes will conduct a comprehensive trial starting Aug. 14 to decide whether Detroit emergency manager Kevyn Orr's plan of adjustment -- the legal term for a debt-cutting plan in municipal bankruptcy -- is fair, legal and feasible.

Detroit wants to slash more than $7 billion in unsecured debt and liabilities, allowing city government to invest $1.4 billion over 10 years in police, fire, blight removal, information technology and infrastructure.

Although several major financial creditors are still fighting the plan, they are now pitted against a grand coalition of the city, Detroit's two independently operated pension funds, the U.S. government-appointed Official Committee of Retirees, two major retiree associations, the city's largest employee union and several public safety unions.

"If this goes forward, we proceed to the trial," said Bruce Babiarz, a spokesman for the Police and Fire Retirement System pension board. "It will be the beginning of the end of the roller-coaster ride that has been the emotional bankruptcy process."

Shirley Lightsey, president of the Detroit Retired City Employees Association, said Saturday that she was pleased with the preliminary results. The association was an early supporter of the grand bargain.

"I'm prayerful and thankful that at least this part is over and we will be going into the challenge with other creditors," Lightsey said.

She said she believes most pensioners understood they had little chance of prevailing in any challenge of the pension cuts and faced far more significant losses to their pension checks if they had voted no.

"I know we have many beneficiaries who have small pensions, and a 27% cut would have impacted their lives," Lightsey said. "The thought of them having to live with a 27% cut to me was unconscionable."

John Eddings, a retired city ombudsman who also voted yes on the grand bargain, said he was surprised by the number of people who said they would vote no, equating differences among retirees to "a couple going through a divorce, where deep inside each side thought the other was hiding $1 million in assets.

"Then if you add in the feelings of betrayal and overwhelming anger, some people let their emotions run rampant," he added. "They were voting to make a statement."

Opponents frequently said they would vote no to preserve their right to a court fight over Michigan's constitutional pension protections, although Rhodes ruled that the federal bankruptcy code trumps Michigan law and many bankruptcy lawyers agreed with that ruling.

Others suggested that the city should be forced to sell art from the DIA to satisfy debts, but Orr noted that any proceeds from the museum would be divvied up among all creditors, leaving a smaller pool of money for pensioners than the $816 million the grand bargain provided.

"No one is happy with the situation," Eddings said Saturday. "You're in a situation where there's a bad choice and a worse choice. Any rational person would vote yes."

Two major objectors

Despite the significant momentum, two well-funded opponents linger as significant obstacles: bond insurers Syncora and Financial Guaranty Insurance Co.

Their opposition to Detroit's bankruptcy is tied directly to a $1.4-billion debt deal they insured in 2005 -- a complex borrowing scheme orchestrated by Mayor Kwame Kilpatrick's administration to backstop the city's pension promises.

Orr's team of Jones Day bankruptcy lawyers has argued the entire deal was a legal "sham" because the city established bogus shell corporations to issue the debt to escape the State of Michigan's legal cap on municipal borrowing.

For now, Detroit is trying to wipe out the Kilpatrick debt, sparking a bitter feud with the bond insurers, which are pushing for a potential sale of the DIA to pay off the debts.

Still, a sale of DIA treasures now appears to be unlikely because the city's retirees and unions are supporting the plan of adjustment instead of joining the bond insurers in a push for a DIA liquidation.

James Sprayregen, a Kirkland & Ellis attorney leading Syncora's case, said the city is improperly favoring pensioners. He rejected the city's arguments against selling art as "legal mumbo jumbo."

"The bankruptcy code does require that the treatment of us be fair and equitable. It means what it sounds like: that we be treated fair and equitably. But we're getting virtually zero," Sprayregen said in an interview. "We think it's quite unfortunate that this massively adversarial process is going on."

Real legal issues remain

If the bond insurers and the city don't reach a settlement within the next month -- or even during the bankruptcy trial -- Judge Rhodes can force them to accept steep cuts.

The bond insurers plan to argue that Detroit's plan of adjustment unfairly discriminates against them.

"This isn't going to be a show trial," said Melissa Jacoby, a University of North Carolina-Chapel Hill bankruptcy professor who has been studying the case. "This is going to be a real trial with real legal issues that are still open, facts that have to be proven with evidence."

For one thing, Judge Rhodes said earlier in the case that "profound change" might be necessary in city pensions -- although he warned that he would not approve steep cuts unless they're fair.

But Rhodes has repeatedly pushed for an expedient resolution of Detroit's bankruptcy, consistently instructing creditors to cooperate with lead mediator Judge Gerald Rosen, who came up with the idea of the grand bargain and asked foundations for donations.

"No one anticipated we would have been this far along as we are now," said Laura Beth Bartell, a Wayne State University bankruptcy law professor. "The fact that he ruled on eligibility so quickly and added the ruling that pensions could be cut, that changed the dynamic of negotiations immediately and has changed the dynamics of what has happened since."

Looking toward the future

With the fast-track bankruptcy speeding toward a resolution, attention will pivot quickly toward Orr's future at the city's helm.</p>

Michigan Gov. Rick Snyder, who appointed Orr in March 2013, has signaled that he wants the emergency manager to stay in place until the bankruptcy's sunset is in full view.

That could happen in the fall, potentially placing Mayor Mike Duggan and the fresh group of City Council members back in control of the city -- with financial oversight from a state board.

By all accounts, Duggan has walked a political tightrope by forging a strong working relationship with both Orr and the City Council.

But when Orr is gone, the looming question is whether the grand coalition that may help end Detroit's bankruptcy can evolve into a political coalition to overcome the bickering that has historically plagued the city.

That's a challenge bankruptcy can't address.

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

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