March 24, 2014 at 9:10 am

Detroit prepares for historic debt deal vote

Daniel Mears / The Detroit News)

Detroit will finalize this week an unprecedented plan to solicit votes from about 32,000 municipal retirees and beneficiaries on a blueprint for restructuring the city’s debt.

The voting process must be clear and explain what impact cuts will have on pensions and health care benefits, U.S. Bankruptcy Judge Steven Rhodes has warned city attorneys.

No later than April 28, retirees will be mailed a ballot and a copy of the city’s plan to cut $18 billion in debt. Retirees and other creditors have until June 30 to submit their votes, which will play a key role in determining whether Detroit forces cuts on creditors — or strikes agreements to emerge from bankruptcy.

“I won’t tolerate any confusion,” Rhodes warned Detroit’s bankruptcy lawyers during a recent hearing. “I just won’t.”

The city’s bankruptcy team is working with a group representing retirees to finalize ballots, and the process will be outlined in a court filing this week, city spokesman Bill Nowling told The News.

The judge’s comments were welcomed by retirees and pension officials confounded by the city’s approach to health care changes and other cuts outlined in its debt-cutting plan.

The risk is that retirees will vote against the debt-cutting plan if the balloting process and supporting documents are confusing, said Douglas Bernstein, a Bloomfield Hills attorney and expert on municipal bankruptcy.

“You have to dumb it down for the average person,” Bernstein said. “You don’t want them hunting for information. They need it in an understandable form to allow them to make an educated decision.”

If retirees and other creditors vote against the debt-cutting plan, Detroit could force cuts on creditors under a process known as a cramdown. Under bankruptcy law, if one class of impaired creditors supports the debt-cutting plan, Detroit can impose cuts on others and get the plan confirmed by Rhodes. The city’s plan, however, must be fair and equitable and not discriminate.

Retirees are among a large pool of creditors that get to vote on the city’s debt-cutting plan, including banks and bondholders.

Under the plan, non-uniformed city employees would get a 26 percent pension cut if they agree not to pursue a sale of city-owned art or drag out litigation over a state constitutional protection of their pensions. If they don’t accept a “timely settlement,” Orr said their pensions could be reduced 34 percent.

Detroit’s 4,000 active and 8,000 retired police and firefighters, who have a better-funded pension fund, would get a 4 percent cut if they accept Orr’s deal or a 10 percent cut if they continue to fight the proposal in court, according to the plan.

The Official Committee of Retirees called Orr’s debt-cutting plan “non-confirmable.” The committee’s legal team also predicted the cuts could amount to 40 percent to 50 percent reductions for 5,658 active Detroit workers and 12,118 retirees in the General Retirement System after Orr’s proposed elimination of cost-of-living increases for 10 years.

The committee also estimated Orr’s plan would put 20 percent of retirees in poverty in that time frame.

The plan has details about retiree health care changes.

Detroit would put $526.5 million into the trust over 20 years to provide health care for current and future city retirees and dependents. If approved, the city would create a health care trust overseen by a board of trustees.

Once established, Detroit would stop providing life insurance or death benefits. Future health insurance benefits for retirees are still subject to negotiation.

Clear, accurate information has been elusive in the bankruptcy case, particularly for retirees, according to Bruce Babiarz, spokesman for the city’s police and fire pension fund. He faulted the city for burying information about benefit cuts so deep in a 400-plus page document that retirees needed “a very large magnifying glass.”

The bankruptcy case’s fast-track timeline could make it difficult to clearly explain the cuts to retirees, said Steven Kreisberg, director of collective bargaining for the city’s largest union, the American Federation of State, County and Municipal Employees.

“There is no reason to believe the city wants to confuse retirees,” Kreisberg said. “There is a common interest among everyone involved to make sure that choices provided to retirees be as clear as possible.”

There is confusion surrounding the level of cuts and treatment of retirees, said former Detroit Water and Sewerage Department worker Jeffery Lyall of Port Sanilac.

He welcomed the judge’s comments about avoiding confusion in the voting process.

“That’s gonna be a tough thing to vote on,” Lyall, 64, said. “I try to stay up on things myself, but sometimes you read one thing and then read another. You get kind of confused.

“On the other hand, if you gamble and end up a lot worse, then you’ll be sorry and want to go back and take the first offer,” Lyall added.

Each retiree will be mailed a CD-ROM containing the city’s debt-cutting plan, a ballot and a return envelope.

Lawyer Carole Neville represents a committee defending more than 30,000 retirees and their beneficiaries and is fighting pension cuts in bankruptcy court. She wants retirees to receive in the mail documentation tailored to retirees.

“They need a simplified version of the plan and the treatment of retirees,” she told the judge during a March 5 hearing. “I can’t imagine sending out CDs to a population that has thousands of people over 85 (years old).”

“I agree,” Rhodes told her. “I am very concerned about that. There are two things they want to know: how much they will be paid and when.”

Neville said the task is complicated by proposed cuts to pensions and health care benefits.

“But it can’t be,” complicated, the judge said. “It has to be straightforward.”

“It can be simplified,” Neville said. “It has to be separate from what regular creditors are getting. They can’t calculate it themselves. We need to do that.”

rsnell@detroitnews.com
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