Detroit files plan for leaving bankruptcy
Detroit's much-anticipated blueprint for dealing with $18 billion in debt and emerging from municipal bankruptcy requires cuts to worker pensions and even deeper cuts for bondholders, according to a plan the city filed in federal court Friday.
Detroit's much-anticipated blueprint for dealing with $18 billion in debt and emerging from municipal bankruptcy requires cuts to worker pensions and even deeper cuts for bondholders, according to a plan the city filed in federal court Friday.
The potentially precedent-setting plan drew immediate rebuke from a variety of parties ranging from union groups to bond insurers, some of which vowed to go to court to prevent implementation. Retirees and pension funds argued the proposed cuts go too deep, while bond insurers complained that bondholders were being treated unfairly.
Kevyn Orr, the state-appointed emergency manager, acknowledged that the plan is far from final, and will be subject to negotiation in the weeks ahead.
The plan of adjustment, delivered to the federal bankruptcy court by Orr, a former corporate bankruptcy lawyer, marks a watershed in the largest municipal bankruptcy in U.S. history.
In the plan, Orr presents two parallel imperatives: putting the city on a path toward long-term financial stability, and emerging from bankruptcy as soon as possible, perhaps even by Orr's self-imposed deadline of September 2014.
Orr's plan calls for a $1.5 billion program to improve essential services and public safety over 10 years, with up to $500 million earmarked for blight removal. It includes changes to Detroit's two retirement systems, the city's largest unsecured creditors, that would reduce investment assumption rates from 8 percent to 6.5 percent for the police and fire funds and from 7.9 percent to 6.25 percent for the general retirement system.
The cuts to unsecured creditors such as the retirement systems and owners of certain Detroit bonds would range from 10 percent to 80 percent.
Orr acknowledged that pensions will be reduced even though philanthropic foundations and the Detroit Institute of Arts have pledged $465 million and Michigan Gov. Rick Snyder has asked the state legislature to approve $350 million to ease the hit on retirees. And he noted that without a negotiated solution to Detroit's bankruptcy, the private funds are at risk. "We really don't have time for a lot of acrimony and litigation," Orr said.
Police and fire retirees who agree to the plan would see their benefits cut by just 10 percent, while cuts for other retirees would be around 30 percent, according to the statement. But a retirees' committee formed for the bankruptcy case contended that many retirees would be hit with as much as a 50 percent reduction in their pensions, forcing some below the poverty line.
"The city seeks to use assumptions regarding the health of the pension plans that are significantly different than those used by the State of Michigan and hundreds of cities across the state and around the country," said Ron Bloom, vice chairman of Lazard, the committee's financial adviser.
"This difference is then used to attempt to justify substantial reductions in pension benefits that are simply not necessary."
A spokesman for the city's police and fire retirement system said the plan "contains debilitating and unnecessary cuts to accrued pension benefits." However, spokesman Bruce Babiarz added the fund will continue to negotiate with the city.
