Bid to end Detroit bankruptcy by October gains momentum

A new Detroit bankruptcy deal would call for much lighter cuts to the city's two major public pension funds. It appears to be gaining traction and is going before a federal judge today.

Paul Sancya/AP/File
Protesters rally outside a federal courthouse in Detroit last year. Detroit reached tentative agreements with pension-holders Tuesday. Now a federal judge is looking at the plan.

A plan that would get Detroit out of bankruptcy by mid-October, and which appears to have crucial support from the city's two major pension funds, is going before a federal judge for certification today.

If US Bankruptcy Judge Steven Rhodes agrees to it, the certification would mark the most significant milestone in the city's bid to get out from under $18 billion in debt since it filed for Chapter 9 relief last July. Since that time, a team of negotiators appointed by the state has gone back and forth with the city’s two major pension funds, which are threatened with deep cuts to benefits.

In recent days, however, a new restructuring plan has gained momentum. The deal, referred to as a “grand bargain,” involves $816 million in funding by art patrons, the state of Michigan, and outside nonprofit foundations.

The money would greatly reduce pension cuts. Past plans called for pension reductions of as much as 14 percent for retired police and fire personnel and 34 percent for retired civilian employees. The new settlement now calls for zero reductions for police and fire and about 4.5 percent for other public employees.

In exchange, retirees will be asked to give up their right to sue the state and agree to allow the Detroit Institute of Arts to transition to an independent entity. Michigan Gov. Rick Snyder (R) supports the plan and, as of late Tuesday, it received provisional support from the city’s two pension groups.

For the plan to work, three things must take place:

  • Judge Rhodes must approve the revised blueprint based on his belief it will make the city solvent. In his decision, he must also determine if the settlement is fair to creditors. Last week, the team of state-appointed emergency manager Kevyn Orr struck a deal with three bond insurers promising them 74 percent of debt owed.
  • The majority of the city’s two retiree groups must vote to approve the plan in May. If one or two of the groups votes against the plan, then everyone is back to the negotiating table.
  • State legislators must vote to approve $350 million from the state. That money would be added to $466 million currently pledged by nonprofit foundations who want to ensure that the most valuable works in the Detroit Institute of Arts collection don't end up at auction. Governor Snyder says the state money can come largely from tobacco settlement money. Lawmakers are expected to vote in May.

As of late Thursday morning, Judge Rhodes indicated that he needed more details. The deals with both pension groups took place less than 24 hours before Thursday’s hearing, so he did not have a revised disclosure statement.

Before breaking for lunch Thursday, Rhodes said he wanted negotiators for the city to address “what the plan provides for supervision regarding the implementation of the plan, assuming it’s confirmed.” In other words, confusion remains over which entity – the city, Mr. Orr’s team, or the state – will supervise the financial restructuring.

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