July 25, 2014 at 11:15 pm

Revised Detroit debt plan calls for 'plan monitor' with subpoena power

Detroit could be under prolonged and apparently unprecedented court oversight if the city successfully emerges from bankruptcy court this fall, according to a plan proposed Friday.

In response to concerns raised by U.S. Bankruptcy Judge Steven Rhodes, the city’s legal team proposed he appoint a monitor to oversee compliance with Emergency Manager Kevyn Orr’s plan to shed more than $7 billion in debt.

The so-called “plan monitor” would file quarterly reports with the court and have power to subpoena records and answers from the mayor, City Council, pension fund trustees and officials overseeing health-care trusts.

The “plan monitor” details are included in a revised version of the city’s debt-cutting plan filed Friday in bankruptcy court.

The post-bankruptcy monitoring proposal was included in the revised plan to give Rhodes an option for long-term oversight, but Detroit’s bankruptcy legal team is open to other ideas, Orr spokesman Bill Nowling said.

“What form any of it takes is up to the judge,” Nowling said Friday.

Attorney James Spiotto, a municipal bankruptcy expert in Chicago, said it would be unprecedented in the nation’s handful of Chapter 9 cases to have the city remain under the court’s oversight for years to come.

But continued court supervision could be comparable to the decade-long federal oversight of Detroit’s police department for civil rights violations and past judicial oversight of the city’s water and sewerage department for pollution violations, Spiotto said.

“It is not something that has been used for Chapter 9,” Spiotto said. “To make it fit within Chapter 9, it would have to be something the city is agreeable to — the City Council and the mayor — because they’re the ones who are going to have to live with it.”

Orr’s legal team proposes the monitor must be a neutral expert skilled in restructuring, accounting, municipal finance and budgeting, preferably for municipalities with “annual revenues of $250 million or more,” according to the filing.

Several types need not apply: “The plan monitor shall not be an appointed or elected official of any governmental unit currently serving in such capacity and shall not be a former appointed or elected official of the city or the state.”

That would seemingly eliminate Orr, a Washington, D.C. bankruptcy who was appointed by Gov. Rick Snyder in March 2013 to takeover the city.

In addition to the monitor, city officials also would be under the scrutiny of a new nine-member Financial Review Commission the Legislature established last month as a string attached to $195 million in state aid for city pensions.

The commission, which will be dominated by state government appointees, will have veto power over city contracts exceeding $750,000 and could remain active for at least the first three years after Detroit exits bankruptcy. Under the new oversight law, if Detroit can meet certain financial benchmarks, the commission would go away after a 10-year period of dormancy.

John Pottow, a bankruptcy law professor at the University of Michigan, said it was expected that Detroit’s municipal finances will be scrutinized for years to come after its epic financial collapse.

“Maybe it’s paranoid, maybe it’s prudent, but there’s going to be strong and strict oversight to make sure the city doesn’t slide back into a default five years from now,” Pottow said.

During an April 17 hearing, Rhodes first suggested having an overseer regularly report to the bankruptcy court about the restructuring plan and any problems.

The judge said at the time he wanted safeguards in the city’s bankruptcy fix-it plan that could prohibit City Council and Mayor Mike Duggan from unraveling Orr’s restructuring of city finances and operations.

“It’s in everyone’s interest — city and creditors — for any implementation issues or challenges or failures to be flagged and dealt with promptly,” Rhodes told city attorneys at the April hearing.

Shortly after Rhodes raised concerns about the mayor’s willingness to carry through with Orr’s plan, Duggan agreed to testify in favor of the plan as a city witness at Detroit’s bankruptcy confirmation trial next month.

Rhodes will hold a trial Aug. 14 to determine whether the plan is feasible.

Detroit’s bankruptcy team said changes in the debt-cutting plan do not adversely affect any creditor so the city doesn’t need to solicit new votes.

Retired and current workers officially approved modest reductions in their pensions last week. But at least four classes of creditors have rejected the city's cost-cutting plan. The results mean there are still contested aspects of Detroit's exit from bankruptcy that will have to either proceed through court or be negotiated.

About 82 percent of retired and active Detroit police and firefighters who voted overwhelmingly approved the city's plan to reduce their inflationary increases but preserve their base pensions, according to balloting results filed in U.S. Bankruptcy Court.

Members of the General Retirement System approved the city’s plan on a margin of approximately 73 percent yes, 27 percent no during a historic 60-day vote that ended July 11, the results show.

Detroit’s plan calls for base pension cuts for GRS members of 4.5 percent. Some GRS retirees and workers face additional cuts of up to 15.5 percent through the city’s plan to recoup excess interest earnings credited to their optional annuity savings accounts.

Detroit also got 88 percent of retirees owed lifetime health insurance benefits to accept $450 million for a $4.3 billion liability — one of the biggest debts the city could shed if the reorganization plan is approved by Rhodes.

The amended plan filed Friday includes details about deals reached with certain bondholders since the last version of Detroit’s debt-cutting plan was filed in May.

rsnell@detroitnews.com
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