Hurdles ahead as Detroit EM pushes detailed plan to restructure debt, reinvest in ... Hurdles ahead as Detroit EM pushes detailed plan to restructure debt, reinvest in city | MLive.com DETROIT, MI -- The list of obstacles to overcome is long, but Emergency Manager Kevyn Orr believes he's prepared a plan that could achieve his ultimate goal for Detroit: shedding the city's massive debt and using the relief to send $1.5 billion into city services. The city's retirees believe the plan could also send them into poverty, but even they say they'll keep trying to reach an agreement on some version of Orr's plan through ongoing, federally mediated negotiation. "We already have witnessed some strong collaboration around innovative ideas," said Gov. Rick Snyder about the plan of adjustment filed in Detroit's bankruptcy case Friday.
"We hope there can be more and that these efforts come to fruition. Detroit's long-term viability is not just essential for its residents -- but to all Michiganders." Orr, a bankruptcy attorney chosen by Snyder to take over Detroit government in March 2013, took the city into a Chapter 9 restructuring within four months of getting his hands on financial records, where he found $18 billion in debt. And after seven months of talks between the city's high-priced squad of bankruptcy lawyers and the banks, bond holders, unions and retiree groups that are owed money,Orr submitted a debt-slashing plan Friday. He wants police and fire department pensioners to take about 10 percent less than they're owed, other retirees to take about a 30-percent cut and bond holders to take an 80 percent hit. "We think our plan is reasonable," Orr said. "We think it is feasible... under the circumstances, the dire circumstances that we encountered early last year when we came into the city." The bulk of the city's debt, according to Orr's estimates, lies in obligations tied to the water department - about $6 billion, retiree pensions and health care - about $9.2 billion combined, and general obligation bonds - about $2 billion. Orr believes the proposed cuts and numerous other restructuring measures detailed in the 120-page plan of adjustment would relieve the city of debt service obligations that have for years crippled Detroit's ability to provide adequate services to residents He wants to redirect $1.5 billion over 10 years to services and infrastructure, including $500 million to be spent demolishing thousands of deteriorating vacant structures across the city. But all that depends on a number of approvals and clearances still being sought: 1. A proposal to lease the city-owned regional water system to Detroit's suburbs for $47 million a year needs approval from the communities that would take control of it. Suburban water officials
only last week received financial documents they said they needed to fully explore the proposal. 2. A group of private foundations have pledged $465 million to a fund that would boost postbankruptcy pensions to the 70- and 90-pecent levels Orr proposed. The funds, along with proposed state aid, would be donated on the condition that the Detroit Institute of Arts collection isn't sold to satisfy debt, and also on the condition, Orr said, that all-around agreement is reached on a final debt restructuring plan, leaving no protracted legal battles. 3. Snyder wants the state to add $350 million to the $465 million that the foundations pledged. The funds would target pensioners in danger of falling below the poverty line. But the money, which would come from tobacco settlement funds, must be approved by the state legislature. 4. Unions and retirees in the bankruptcy case filed an appeal of the December court determination that ruled Detroit eligible for bankruptcy, and found pensions to be legally subject to cuts in the Chapter 9 process. The U.S. Sixth Circuit Court of Appeals on Friday, just before the plan of adjustment filing, agreed to hear the appeal. That appeal would have to be resolved before a final plan of adjustment is confirmed. 5. A lawsuit and a negotiation process with several banks that hold debt related to past attempts at paying pension obligations are pending and would have to be resolved as part of the restructuring plan. 6. Finally, U.S. Bankruptcy Judge Steven Rhodes must approve a plan of adjustment. It's likely to take months of continued negotiation before Rhodes signs off on a final plan. Orr hopes to be through with the process by September, when Detroit City Council can legally vote to remove him as emergency manager after 18 months in office. Even with several more months ahead in the process, Wayne State University bankruptcy law professor Laura Bartell said the pace of Detroit's bankruptcy case has been uncommonly fast. "This has been a very short bankruptcy so far," she said. "The speed is astonishing. There will be some more months. That's still a very fast-track bankruptcy." She said the speed is likely due to a combination of Orr's desire to complete the process by September and Rhodes' vocal pursuit of a fast pace to spare the city time and money.
Bartell was also struck by the reliance on private foundation money -- pledged in a settlement known as the Grand Bargain -- to fund the pensions in Orr's plan.
"It surprised me that the city is relying so heavily on the proceeds from the Grand Bargain in order to fund the plan," she said. "... It makes you wonder what happens if the Grand Bargain falls apart." It's a concern retiree groups expressed as they protested the plan Friday, saying they estimate 20 percent of Detroit pensioners would fall into poverty within 10 years as a result of benefit cuts proposed in the plan. "Many retirees who live on the edge will fall below the poverty line. Everyone else will see major cuts to their pension," said Terri Renshaw, chair of a committee appointed by the U.S. Trustee's office to represent more than 23,500 retirees in the bankruptcy case. Slashing retiree health care obligations is another major part of Orr's debt adjustment plan, which proposes putting $526.5 million into a trust over 20 years for health care benefits. The retiree committee estimates an 85-percent reduction in city spending on retiree health care proposed by the plan. "It is a slap in the face to those who gave their working lives to the city," said Shirley Lightsey, a 79 year-old retiree who is vice chair of the retiree committee. "Too many people have worked too long to accept such treatment without a fight." But even as they panned the plan Friday, retiree representatives said they hope to continue negotiations and eventually come to agreement with the city on a final plan. "We're hoping that it can be modified and improved though the mediation process," said Ryan Plecha, one of the attorneys representing retirees in the case. Even Lightsey, after calling Orr's proposal a slap in the face, pledged to continue negotiations, which for seven months have been facilitated by a team of federally appointed mediators. "If the city and others truly want to work with retirees, the committee remains ready, willing and able to work with them to seek a mutually acceptable solution," she said. Orr said negotiations will continue. "We are working very hard to reach negotiated solutions with our stakeholders," he said. But he also called the cuts he proposed fair. "When you're talking about a city that's in as dire situation as it is here and we're in the 90 percentile rank, I'd have to think that reasonable people would look at that and say 'Gee, that's pretty modest, if not imminently acceptable,' so I'd like to think that at some point, the people in uniformed services will take a look at this and say 'You know what? We did Ok,'" Orr said in a conference call after filing the documents Friday. "To think that we can get to a level, with the foundation money, at 70, 75 percent (for non-uniformed retirees), or even without it, if we not reaching an agreement and it's at 60, that too is from my perspective, from where we were, very, very, fair." Retirees have argued that Orr's estimates of how drastically underfunded the city's pension funds are rely on overly conservative financial projections.
"The city's proposed plan of adjustment is based on the flawed premise that it needs to dramatically reduce retirement benefits in order to invest in its very necessary revitalization," said Ron Bloom, a financial adviser to the retiree committee in a statement. "Of course the city needs investment, but there is no reason for it to come at the expense of its pensioners. The city seeks to use assumptions regarding the health of the pension plans that are significantly different than those used by the state of Michigan and hundreds of cities across the state and around the country. This difference is then used to attempt to justify substantial reductions in pension benefits that are simply not necessary." Orr said conservative accounting is necessary in a city that was driven into insurmountable debt in part by mismanagement of pension funds. "We are being relatively prudent with our financial projections because we don't want to get the city into a spot where the projections that we've all agreed to going forward are overly confident," Orr said. "When they don't materialize, then where are we? We're short." Meanwhile, much deeper cuts are being proposed for other, non-retiree, unsecured creditors, who would get about 20 percent of what they're owed, but with a chance of collecting more later if the city sees unexpectedly high revenues in the future. "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," said Steve Spencer, an adviser to bond insurer Financial Guaranty Insurance Co., in a statement. Orr again called those proposed cuts fair. "We need to grow the city," he said. "We need to grow the population, that tax base. We need to provide services... We can't do that with adequacy. I'm not talking about four stars. I'm talking adequacy. We can't do that without these cuts and we can't service the debt that we owe... We owe in excess of $2 billion (to bond holders) that we don't have. So are those cuts fair? Yes, given the requirements of the Chapter 9 in the statute... That money has to come from somewhere." View the full plan of adjustment here, and an outline on how the city plans to reinvest in city services as a result of the debt relief here. Follow MLive Detroit reporter Khalil AlHajal on Twitter @DetroitKhalil or on Facebook at Detroit Khalil. He can be reached at kalhajal@mlive.com or 313-643-0527.