February 27, 2014 at 1:00 am

Daniel Howes

Chapter 9 players reluctant to commit

The limited tenure of Emergency Manager Kevyn Orr looms in the city bankruptcy case. (Max Ortiz / The Detroit News)

Everybody’s talking in Detroit’s historic Chapter 9 case, but no one is moving — at least not publicly.

There are no deals yet, despite a tight court schedule reinforced this week by U.S. Bankruptcy Judge Steven Rhodes’ scheduling order. Financial creditors are likely to settle, but not until they see what the city’s unions do and how any movement might affect settlement numbers.

Pension funds won’t budge until they see whether an appeal to the 6th Circuit stops the case by overturning Rhodes’ ruling that federal bankruptcy trumps state constitutional protection for vested benefits. Unions are acting as if talks with Emergency Manager Kevyn Orr are collective bargaining sessions, but they aren’t because collective bargaining is suspended for five years under Public Act 436.

“It doesn’t get any better,” a source close to the situation said in reference to the restructuring plan Orr filed last week with the court. “The next two weeks are the come-in-from-the-cold weeks. If we don’t have a negotiated deal on this, the whole thing falls apart.”

What we have here are the makings of a classic Detroit confrontation, a titanic battle pitting the city’s creditors and its traditionally slow-walking unions against the twin realities of the city’s limited cash flow and a bankruptcy judge determined to speed the case to stanch the financial hemorrhage.

In the background hums the white noise of appeals and litigation, allegations of bad faith and foot-dragging. In the foreground is evidence of a entitled culture accustomed to incremental change clashing with the unforgiving muscle of the federal bankruptcy code and a judge willing to flex it.

Caught in the middle is Orr, forced to balance a September end to his 18-month term with adversaries who say they cannot accept proffered remedies he cannot guarantee. His plan, for example, offers pension funds sweetened terms for early acceptance of an offer that is contingent on political forces he does not control.

Namely, is the $815 million fund to bolster city pensions and protect the Detroit Institute of Arts’ collection, in fact, deliverable? The foundation-led fund is contingent on negotiated settlements and $350 million in state matching funds, but the state contribution is endangered by skeptical Democrats, majority Republicans and a governor hesitant to fight to ensure the DIA fund can be delivered as advertised.

In exchange for politically dicey votes on Detroit in an election year, Republicans are angling to extract major concessions from Gov. Rick Snyder — most likely a larger income tax rate cut than the governor, a self-confessed neophyte at grubby political horse-trading, claims to be willing to consider.

He may have no choice. But his suggestion that the Legislature is unlikely to act until unions and financial creditors move on Orr’s proposed restructuring plan presents a strategic conundrum: why would creditor groups whose settlements would be affected by the DIA fund take the deal in advance of legislative action?

They wouldn’t, in all likelihood, unless the courtroom calendar threatens to expire before the Legislature acts. The expected end of Orr’s term, subject to a vote by the City Council, is driving Rhodes’ aggressive schedule for a process that typically can take years of discovery and litigation, and produces massive legal bills.

The $815 million DIA fund is the linchpin of Detroit’s bankruptcy exit plan. In a 90-minute briefing Wednesday, the case’s lead federal mediator, Chief U.S. District Judge Gerald Rosen, told foundation presidents that all three pieces of the DIA fund — the $365 million from 10 foundations, $100 million from DIA benefactors and $350 million from the state — are critical components of the restructuring.

If any of those three pieces fails to materialize, the judge told the foundations and DIA Chairman Gene Gargaro, “the deal is not doable,” said a participant in the meeting. That means, quite simply, that legislative action is likely to determine the fate of Rosen’s so-called “grand bargain,” including its premiums for pensioners and backstops for the less fortunate.

Nearly nine months since the July 18 Chapter 9 filing “should be enough time for people to understand the need to come together,” James Spiotto, managing director of Chapman Strategic Advisors LLC, said in an interview. “The one thing about Chapter 9 that is so simple often gets lost: everyone needs everyone else.”

The city needs employees to do the work to implement its restructuring plan. The city and its employees need the capital markets — lenders, bondholders, insurers — to finance the city’s efforts at reinvestment. Unions and pension funds need any municipal growth plan, bolstered by outside investment, to succeed sufficiently enough to support contracts and promised pension obligations.

But acrimony intrudes. The proposed pension cuts, gutted employee health care plans, minimal recoveries for financial creditors and public displays of leverage amid federal mediation are combining to make settlements appear problematic, at least until Rhodes’ schedule forces action.

“You have kabuki theater in Chapter 9 and that’s the posturing,” Spiotto said. “Hopefully retirees and employees see this is the best they’re going to do. Otherwise it isn’t kabuki theater — it’s kamikaze.”

daniel.howes@detroitnews.com
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Daniel Howes’ column runs Tuesdays, Thursdays and Friday.