Detroit bankruptcy in cruise control – but there are big speed bumps ahead
Detroit’s historic bankruptcy case has picked up steam in the past couple of weeks.
The city reached tentative agreement with some of its major creditors, clearing the way for a relatively quick exit from bankruptcy court.
But there are still some key missing pieces that could derail the process, and now they’re mostly outside the city’s control.
“Now is the time to negotiate”
Things really started speeding up on April 11, when Judge Steven Rhodes – the ultimate decider of everything in Detroit’s bankruptcy case – ruled the city could pay two major banks $85 million.
The settlement lets Detroit wipe out a complicated financial transaction that went sour years ago, and regain direct access to its casino revenues. The bad interest-rate swaps deal had cost about $200 million since 2009.
But in announcing his decision, Judge Rhodes also made a point of telling the city’s other creditors that “now is the time to negotiate.”
Soon after that, settlements started piling up.
Most of the city’s unsecured bondholders struck a deal to recoup 74 cents on the dollar – a much better return than the 15 to 20 cents emergency manager Kevyn Orr had been offering.
And Detroit’s two pension funds approved deals that would spare pensions the kind of deep cuts Orr had initially threatened. Retirees will still take hits, some more than others.
According to Wayne State University bankruptcy law professor Laura Bartell, that last deal is especially important.
“Having the pensioners on board – or at least their representatives on board – makes it far more likely that with their recommendation, the two pension classes will vote in favor of the plan,” Bartell said.
The “plan” Bartell is talking about is Orr’s plan of adjustment.
It’s the key document in any municipal bankruptcy – the city’s blueprint for shedding its debts, and emerging from bankruptcy with a clean slate.
Orr’s stated goal of emerging by mid-October had struck many people as too ambitious. Now it seems like a real possibility.
But city creditors still need to vote on the plan. And among them, pensioners are the biggest wild card.
While the proposal calls for less pain than many people expected, there’s still a sense among many retirees that it’s just not fair to slash pensions.
Cheryl Williams feels that way, and says that sense of unfairness might influence how she and other pensioners vote.
“It is very possible, because my husband and I are both general retirees,” Williams says. “So what happens to us happens to everybody.”
The deal calls for general system retirees to take 4.5% pension cuts. They would also lose their annual cost-of-living adjustment.
But in Williams’ household, the impact is doubled. And she says they’re already dealing with health care costs that have shot up since all retirees lost their city-sponsored insurance in March.
“It puts us in a very precarious situation,” Williams says.
Many retirees point out that as public employees, they made a pretty modest living – and most don’t get huge pensions. But they did bank on secure retirement benefits.
Retiree George Marcinkowski, who spent 21 years on the Detroit police force, says those benefits are a big reason why he and his fellow officers agreed to pay freezes and other cost-cutting measures over the years.
“They always said 'Well, we’re really taking care of you on retirement,'”Marcinkowski says. “And…we bought it.”
Nonetheless, Marcinkowski plans to vote for the settlement. The current deal shields uniform retirees from any pension cuts, though they will have to give up part of their cost-of-living adjustment.
Marcinkowski says nobody’s happy with the situation, but “I think it’s probably the best deal we’re going to end up getting.”
Will there be a “grand bargain?”
And that’s the gamble retirees have to weigh when deciding how to vote.
But there’s another big question mark here: The pension settlements depend on a so-called “grand bargain” coming through.
That bargain, pushed by federal court judge and bankruptcy mediator Gerald Rosen, would use more than $800 million from the state and private foundations to minimize pension cuts. And it would protect the Detroit Institute of Arts from a possible fire sale to pay off city creditors.
Michigan State University economist Eric Scorsone says that means state lawmakers have to come up with $350 million over 20 years.
“So we’ll see now if the Legislature is willing to step forward,” Scorsone says. “Obviously, the governor will probably be putting quite a bit of pressure on them to do that.”
But while Gov. Snyder is on board, many Republican lawmakers have balked at the idea of giving Detroit any money at all. Some see the grand bargain as a bailout in disguise; others want to attach conditions to the money.
Scorsone says nothing like the grand bargain has really ever been tried before – and that regardless of what Lansing decides, Detroit is making history.
“This bankruptcy’s really going to set the stage for future bankruptcies in the municipal area, even outside of Michigan,” he says.
Orr’s office says ballots should go out to creditors by the start of next month. They’ll have almost two months to vote.
Judge Rhodes has the final say. He's scheduled a trial to decide whether the plan of adjustment is “fair and equitable” for July.
So while Detroit’s bankruptcy seems to be on cruise control right now, the situation remains delicate. Some key pieces need to fall into place – fast – to keep the process on track.