The Detroit skyline from Belle Isle on Friday. . (Charles V. Tines / The Detroit News)
The proposed cuts to Detroit pensioners, the real people most affected by the city’s historic bankruptcy, aren’t what Emergency Manager Kevyn Orr proposed back in June.
They’re less severe, according to documents filed Friday in the city’s Chapter 9 case. And pensioners can credit the Detroit Institute of Arts rescue effort, a coalition of 10 foundations, museum benefactors and the state of Michigan committing $815 million to bolster pension payouts.
Under terms proposed by Orr, police and fire pensioners could recover as much as 96 percent of the current monthly payouts if they settle with the city this spring. Payouts to members of the General Retirement System would be 74 percent of current levels, considerably more than Orr suggested in last June’s proposal to creditors.
It is “a much greater recovery than we anticipated,” said David Heiman, one of the city’s many Jones Day bankruptcy attorneys. “And part of that is the money that the foundations, the state and the DIA are preparing to put it.”
The city’s latest bankruptcy filings, including the so-called “Plan of Adjustment” and accompanying “Disclosure Statement,” mark a critical turn in the landmark Chapter 9 case. The nation’s largest municipal bankruptcy in its most impoverished major city is expected to set new precedents that could reshape the public finance markets and the sanctity of public pensions.
The foundation-led rescue of the DIA, augmented by a proposed $350 million in state contributions over 20 years, is the linchpin in the proposed workout. Without the fund — conceived by Chief U.S. District Judge Gerald Rosen, lead federal mediator in the case — proposed payments to pensioners would be more meager and the DIA’s collection would be vulnerable to creditors.
“The bargain is so good it’d be madness to let it fall through,” Orr said from Philadelphia, where he is speaking at a conference. “I don’t know anyone who could walk away from almost $1 billion. The DIA is an asset of the city, and we have to resolve this one way or another.”
He repeatedly stressed that use of the DIA fund to supplement pension payouts is contingent on negotiated settlements. Any effort to claim higher payouts and still press for liquidation of the art would cause donors to withdraw the fund, reducing expected payouts for pensioners and those who would be when they retire.
Call it a threat or call it leverage; the intent is the same. Municipal bankruptcy, by definition, is a federal process to determine how much less than 100 percent unsecured creditors will receive from the debtor. The simple fact is that the effort to shield the DIA’s collection from creditors pumps $815 million into the process that otherwise wouldn’t be there.
Creditors disagree, naturally, signaling a fresh round of arguments over the DIA and the value of its holdings. Is auctioning Bruegel’s “The Wedding Dance” or Van Gogh’s “Self-Portrait” to raise cash a more proper way to leverage Detroit assets in the service of creditors, whatever the consequences to the city, its image and its stewardship of fine art?
“Given the importance of the DIA art as a catalyst for Detroit’s overall recovery, it is vital that the full value of the collection be explored in order to generate billions of additional dollars for the benefit of all creditors, including pensioners,” said Steve Spencer, financial advisor to Financial Guaranty Insurance Corp., which insures $1.1 billion of the city’s “Certificates of Participation.”
The Official Committee of Retirees called the plan “nonconfirmable.” It said the plan would cause 20 percent of city retirees to live below the federal poverty line over the next 10 years; that pensions would be cut 40-50 percent; and that the interest rate used to calculate the health of existing pension funds is “unjustifiably low.”
That’s up to U.S. Bankruptcy Judge Steven Rhodes to decide in what promises to be a contentious trial over Orr’s restructuring. At face value, the proposed pension reductions — which Rhodes ruled legal in bankruptcy, despite state constitutional protection — arguably try to meet his test that cutbacks be reasonable.
But the affected, facing options labeled bad and worse, are not likely to accept them easily. The city’s plan, intentionally or otherwise, demonstrates a clear bias toward protecting city assets to ensure future growth (DIA) or leveraging them to fatten revenue streams (water and sewerage department) that in both cases could be perceived to be boons to the suburbs.
Maybe, except Orr’s plan also shows a bias toward all Detroiters, not just those who do or did draw a paycheck from the city. He proposes to spend $1.5 billion over the next 10 years in the city to improve basic city services, attract business investment and upgrade public lighting and information technology.
He aims to lay the groundwork for Mayor Mike Duggan to push improvements to public safety, replace outdated equipment and improve response times. He would retain the city’s pension plans, but require stricter oversight and more conservative returns.
In short, the EM’s plan outlines a vision for Detroit that would be both familiar and new at the same time. His updated version, still very much a work in progress subject to the whipsaws of legal wins and losses, endeavors to make functions and institutions run more efficiently in the service of those who pay the bills.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays.