Signs of Hope in Detroit’s Historic Bankruptcy Case
Policy + Politics

Signs of Hope in Detroit’s Historic Bankruptcy Case

Reuters/Rebecca Cook

After months of turmoil and uncertainty, the broad outlines of a settlement of Detroit’s historic bankruptcy case are beginning to take shape.

Kevyn Orr, the emergency manager appointed by Republican Gov. Rick Snyder to take charge of the beleaguered city and lead it through one of its worst periods ever, has set his sights on exiting the bankruptcy proceedings by Oct. 15.

A prominent Washington, D.C., bankruptcy attorney with a deft political touch, Orr has been abetted by federal judge Steven Rhodes. The no-nonsense veteran bankruptcy jurist has frequently lectured creditors and city officials on the importance of a swift resolution of the crisis that ultimately protects the interests of Detroit’s 700,000 residents and city retirees.

Related: Detroit’s 60-Year Decline into Bankruptcy Hell

“The message is that now is the time to negotiate,” Rhodes said last week, in endorsing Orr’s efforts to close the books by late fall on the nation’s largest Chapter 9 municipal bankruptcy case.

Arguably the biggest obstacles to resolving more than $18 billion of long-term obligations have been:  1. Persuading major banks to let the city out of the preposterously unfavorable loan terms that were negotiated by the incompetent and corrupt administration of former mayor Kwame Kilpatrick; and 2. Winning major concessions from retired city workers and pension fund trustees to free up money to improve city services and tear down tens of thousands of blighted and abandoned buildings.

Late last week, Rhodes approved an $85 million settlement between the city and mega banks UBS and Bank of America Merrill Lynch to free Detroit of an agreement that the Kilpatrick administration negotiated in 2005 and 2006 to borrow $1.4 billion for the city’s vastly underfunded pension program. The city brokered the “interest rate swap” agreement in order to secure a steady interest rate of 6 percent on the massive debt loan. The deal soured after interest rates began to plummet during the economic crisis, leaving Detroit with a $50 million a year bill from the two banks, according to the Detroit Free Press.

Related: Detroit Bankruptcy Is Big Red Flag for Other Cities

Then, on Tuesday, negotiators for Detroit’s pension boards and a retirees group reached tentative agreement on a deal that would require some retired city workers to accept a reduction of pension benefits – but not nearly as big a cut as Detroit officials previously sought.

The agreement, struck after days of intense private talks, calls on municipal retirees’ pension checks to be reduced by 4.5 percent – but far less than the cut of at least 26 percent that had been previously requested by the city, according to The New York Times.

Retired police officers and firefighters would see no cuts in their current pension checks, compared with cuts of at least 6 percent that Detroit officials had insisted were needed. Retired municipal workers would receive no further cost-of-living adjustments, while retired cops and firefighters would continue to receive a COLA, but at a diminished level, according to The Times.

The tentative agreement was negotiated by leaders of the Detroit Retired Police and Firefighters Association and the city’s two pension systems. However, it was unclear whether employee unions and an official committee representing all retirees would go along with the deal.

Related: After Detroit, Who Will Cut City Pensions Next?

The Wall Street Journal noted that retirees and other creditors have long objected to the city’s bankruptcy filing and its debt-reduction plans. If all of the retiree groups reject the terms affecting them, they would risk losing an infusion of $816 million pledged by private foundations and the state to help fund city pensions and preserve Detroit’s famed art collection.

It also wasn’t clear how Orr and other city officials were able to scale back the cuts to pension payments that they’d wanted earlier.  The city has said that the retiree pension funds are short by about $3.5 billion.

However, the Detroit Free Press reported on Wednesday that the Obama administration and state officials are in discussions on a deal that would free up an additional $100 million to soften the blow to Detroit pensioners. The federal government is being asked to support a move by the state to give Detroit $100 million for blight remediation from the federal “Hardest Hit Fund” designed to assist struggling homeowners. If the administration honors that request, it would free up $100 million of the more than $500 million that Orr planned to spend for blight removal over the next 10 years. Orr could then use that money to reduce pension cuts.

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