February 21, 2014 at 1:00 am

Detroit bankruptcy exit plan: Pension cuts, millions for blight

During a court hearing Wednesday, one of Detroit's lead bankruptcy attorneys suggested the city may portray the plan as Detroit's best hope for fixing city services and stemming a decades-long population and business exodus. (Brandy Baker / The Detroit News)

Emergency Manager Kevyn Orr pushed retirees Friday to accept smaller-than-expected pension cuts — which he called “modest” for cops and firefighters — as Detroit’s major creditors criticized his reorganization plan and vowed to fight for a better deal.

Orr sought to curry votes from retirees for a quick exit from Detroit’s historic bankruptcy with an “unprecedented” $815 million infusion of cash from private foundations, the state of Michigan and Detroit Institute of Arts donors.

Under the deal proposed Friday, non-uniform city employees would get a 26 percent reduction in their pensions if they agree not to pursue a sale of city-owned art or drag out litigation over state constitutional protection of their pensions. If they don’t accept a “timely settlement” within the next month, Orr said they could see their pensions reduced 34 percent.

“Without a negotiated solution, these funds are at risk,” Orr told reporters Friday, later adding, “I don’t know anyone who can walk away from almost a billion dollars.”

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.

“I happen to think reasonable people would look at that and say ‘that’s pretty modest,’ ” Orr said of the proposed cuts to police and fire pensions.

With no apparent deals reached with retiree groups, Orr’s 120-page “plan of adjustment” pitting retirees against banks and bondholders was released on the same day the 6th Circuit Court of Appeals accepted a direct appeal of Detroit’s eligibility for bankruptcy from the city’s pension funds and largest labor union. The plan, which is preliminary, can be amended in the coming weeks before the city and its creditors battle over the details in bankruptcy court.

The reorganization plan and a voluminous 440-page disclosure statement provides a detailed road map for the city to exit bankruptcy by slashing half its $18 billion in debt and upgrading aging infrastructure in a bid to turn around the Motor City’s decades-long decline.

Gov. Rick Snyder’s pledge of $350 million in aid toward the $815 million fund is contingent, in part, on creating a safety net for low-income retirees to ensure their pensions are not reduced below $15,856 a year, Orr said.

By comparison, Orr proposes slashing payments to general obligation bondholders owed $374 million by 80 percent. The overall plan would eliminate $9 billion from the city’s roughly $11 billion in unsecured debts owed for pensions, retiree health insurance and bondholders, Orr spokesman Bill Nowling said.

Losing COLA draws fire

Calling the plan “non-confirmable” in bankruptcy court, the Official Committee of Retirees 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, despite the governor’s safety net provision.

“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, the committee’s financial adviser and President Barack Obama’s former autos czar.

In divvying up the city’s limited resources, Orr’s reorganization plan proposes spending $1.5 billion over the next decade on improving city services to combat blight, crime and other problems that have contributed to a decades-long population decline in Michigan’s largest city.

Steve Spencer, financial adviser for Financial Guaranty Insurance Corp., a bond insurer on the hook for $1.1 billion in Detroit’s pension-related debt, said the emergency manager’s plan leaves “billions on the table” by shielding the DIA’s entire 60,000-piece collection from a sale to satisfy creditors.

“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,” Spencer said in a statement.

Kriss Andrews, the former state-appointed program manager for Detroit, said it’s not surprising the city’s plan favors retirees over the investors of city debt.

“I think pensioners at the end of the day are going to get a little bit better deal because they are a more visible human face,” Andrews said. “A visible human face — fairly or unfairly — probably counts more than an invisible face.”

But the plan’s protection of the DIA art collection still rankled some retirees.

“Why aren’t they selling the art and Belle Isle instead of ruining the lives of city workers? Art means more to the politicians,” said Emery Esse, 63, a retired police officer who lives in Fort Collins, Colo.

'Unnecessary cuts'

After losing a fight to keep the city out of bankruptcy court last fall, the city’s retiree groups, pension funds and labor unions appeared dug in for a battle to prevent precedent-setting reductions in their members’ benefits. The city claimed $3.5 billion in pension debt in its July bankruptcy filing and a $5.7 billion health insurance liability, which would be whittled down $526.5 million in payments over 20 years.

Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, said the proposed 4-10 percent pension reduction, coupled with the elimination of future increases, would amount to “debilitating and unnecessary cuts to accrued pension benefits.”

Orr’s proposed cuts, for the first time, quantify the reductions facing retirees, who have anxiously awaited specific details since Detroit filed bankruptcy July 18. Orr offered pensioners as little as 20 cents on the dollar back in June before seeking bankruptcy protection from creditors owed $18 billion.

“The proposed plan of adjustment is a gut punch to Detroit city workers and retirees,” said Al Garrett, president of the American Federation of State, County and Municipal Employees Council 25, the city’s largest union.

The plan calls for no general fund dollars to be spent on pensions through June 2023.

“Instead, any excess cash not required for city operations in this time frame will be utilized for reinvestment in city services and payments to” other bondholders and other creditors, according to a 440-page disclosure statement filed with the plan of adjustment.

The plan had 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, Nowling said.

The city recently reached a deal with the retiree committee to eliminate city-sponsored insurance starting March 1 and shift retirees onto Medicare or private plans sold on the federal insurance marketplace.

“The plan essentially eliminates health care benefits for retirees and drastically cuts earned pension benefits,” Garrett said. “Retirees cannot survive these huge cuts to the pensions they earned. The plan is unfair and unacceptable.”

Snyder’s funding pledge of $350 million from the state’s tobacco settlement fund, which is backed by Republican legislative leaders, still needs approval of the full Legislature. But the Republican governor was optimistic Friday that the infusion of cash from state and private sources would soften the blow of Detroit’s financial collapse for retirees.

“I think that helped quite a bit. That was the point of doing it was to help minimize that impact,” Snyder said in an interview with The Detroit News in Washington, D.C. “I think it’s a very constructive step, and I certainly hope the retirees see value in that and will want to settle on that.”

Staff Writers Marisa Schultz and Christine Ferretti contributed.