July 11, 2014 at 1:00 am

Sources: Detroit's debt-cutting plan headed for approval by retirees

The Spirit of Detroit (Brandy Baker / The Detroit News)

The city’s $7 billion debt-cutting plan appeared to have the support of Detroit retirees Friday, after early returns showed pensioners favoring the proposal in significant numbers, sources told The Detroit News.

More than 32,000 former and current city employees had 60 days to vote on the plan and a “grand bargain” that would soften pension cuts and shield the Detroit Institute of Arts collection from creditors.

The results of the vote will impact a trial next month over whether U.S. Bankruptcy Judge Steven Rhodes will confirm the restructuring plan, which includes unprecedented cuts to pensions and other creditors.

“The trial becomes more complicated or controversial if there’s a lot of votes against the plan,” said Michael Sweet, a San Francisco bankruptcy attorney who is following Detroit’s case.

Two classes of Detroit pension recipients — police and fire and civilian retirees — have been supporting the plan, sources said, but the final outcome wouldn’t be clear until the final votes were received and tallied late Friday. In both cases, more than two-thirds of members have voted in favor — with slightly more police and fire retirees backing the plan, sources familiar with the balloting said.

It now appears a preliminary tally will be complete by Monday evening, but it's not clear precisely how many votes remain to be counted. Based on the estimated votes left to be counted, it appears both classes will approve the plan by significant margins — even if nearly all the remaining votes were negative — with the only remaining issue of whether both classes of voters will have yes votes from pension recipients holding two thirds of the claims. As of Friday, both had above the two-thirds necessary — with the police and fire plan have a larger margin of support.

In both plans, retirees are supporting the plan by more than double the votes of active workers — but retirees outnumber active workers by about three to one. Neither plan has majority support among active employees.

A separate question on whether to endorse health care changes has won almost universal backing from plan members.

The ballots were being counted in California, and it was still unclear Friday night how many ballots were received. As of Thursday, of the 11,979 eligible votes in the police and fire pension plan, just over half had been submitted and counted — and a significant majority voted in favor, sources said.

Less than 40 percent of ballots from the more than 20,000 eligible General Retirement Service plan for non-uniform employees had been returned as of Thursday night.

Sources said only a massive, unexpected surge of “no” votes could tip the vote against the plan in either class.

In each creditor class, approval requires a majority vote and the “yes” votes must represent two-thirds of the total claims for each class. As of Thursday, that appeared to be the case for both plans, sources said.

The city did not release an official ballot tally on Friday.

“As voting has come to a close on the Plan of Adjustment, the city will now tabulate and check the results,” Emergency Manager Kevyn Orr said in a statement. “Once that process is completed, the city’s vote administrator will prepare an affidavit that will be filed with U.S. Bankruptcy Court for the Eastern District of Michigan attesting to the voting results by creditor classes. The city expects that affidavit to be filed on July 21, which is the date the court has stipulated that the voting results be submitted.”

Bruce Babiarz, a spokesman for the police and fire pension fund, declined to comment on the returns until an official tally is in. He added the whole bankruptcy process has been “gut-wrenching.”

“It’s been a roller coaster ride for retirees,” Babiarz said. “It may be the end of the roller coaster ride, depending on how the vote goes. It’s up to retirees whether we expedite out of bankruptcy this fall or go to the next phase.”

The vote tally had been shrouded in secrecy, but in May, Orr said early returns showed support among retirees — which drew a rebuke from the judge.

Orr’s spokesman Bill Nowling would not reveal how many ballots were cast or comment on the voting process Friday.

A “yes” vote from retirees will have an immediate impact. Several groups, including retirees, are trying to overturn the city’s eligibility for bankruptcy relief, and oral arguments in the appeal are set for July 30 in Cincinnati.

The city’s pension funds will forgo oral arguments if retirees support the restructuring plan.

In all, 67,000 creditors spread out across the globe were eligible to cast a vote on a plan to end the bankruptcy case.

Orr has expressed concern that some retirees and current workers may vote down the deal, triggering deeper cuts. His plan calls for no base cut for retired police officers and firefighters, but a reduction in their annual inflationary raises from 2.25 percent to 1 percent.

The city proposes a base 4.5 percent cut for general retirees and the elimination of cost-of-living increases. Those base pension cuts could swell to 27 percent or higher if that class of creditors rejects the deal, Orr said.

Detroit firefighter Byron Robinson voted against the plan, in part to preserve his right to appeal.

“Everything that’s been going on is illegal, in my eyes,” said the Belleville resident, 53.

Also Friday, a federal judge ruled casino tax revenue belongs to the city and can’t be tapped by a bond insurer while Detroit is in bankruptcy. The order by U.S. District Judge Bernard Friedman dealt a setback to one of the last holdout creditors, Syncora Guarantee Inc.

Friedman affirmed a decision by the bankruptcy judge that tax revenue from three Detroit casinos are property of the bankruptcy estate and subject to an automatic stay freezing lawsuits against the city.

The order came nine days after the 6th U.S. Circuit Court of Appeals ordered Friedman to decide the merits of an appeal from Syncora, a bond insurer.

Syncora is one of the insurers of debt Detroit issued to prop up pension funds representing civil retirees and police and fire retirees in 2005.

In 2005, Detroit borrowed $1.44 billion from investors through a financial note called “certificates of participation.” The deal was designed to pour money into the two pension funds. The pension debt was made more complex by an interest rate swaps deal layered on top of $800 million of the debt. The city traded a variable interest rate for a fixed rate.

The swaps initially gave Detroit lower borrowing costs. But when interest rates plummeted in 2008-09, the annual payment ballooned from an estimated $5 million to $50 million.

The city claims the deal was illegal.

Syncora has said in court records it faces the prospect of “massive” losses because it was “a participant in every facet” of the pension debt. Syncora’s losses could exceed $270 million, according to court records.

The bond insurer appealed Rhodes’ Aug. 28 ruling that it couldn’t gain access to wagering tax revenues that were pledged as collateral in 2009 for interest rate swap payments in the deal.

Syncora appealed Rhodes’ ruling in October that the bankruptcy’s automatic stay, freezing litigation against the city, protected the $15 million in monthly taxes generated by Detroit’s three casinos from being captured by Syncora.

rsnell@detroitnews.com
(313) 222-2028
Staff Writer Christine Ferretti contributed.