The Detroit emergency manager offered this disclosure statement with his plan of adjustment:
View/download: Plan of Adjustment
Kevyn Orr, the Emergency Manager for the City of Detroit ("Detroit" or the "City"), today filed the City's Plan of Adjustment ("Plan") and a related Disclosure Statement with the United States Bankruptcy Court for the Eastern District of Michigan ("Bankruptcy Court"). The Plan and Disclosure Statement provide the details of the City's proposal to (i) adjust up to as much as $18 billion in secured and unsecured debt, (ii) implement a necessary 10-year plan to invest in the City and improve essential services and public safety for its 700,000 residents and (iii) restore its heritage as a productive, vibrant American city.
Mr. Orr and his team are confident that the filing of the Plan is the most effective and efficient method to reorganize the City's financial affairs, provide an opportunity for the City to revitalize itself and continue efforts to once again make Detroit an attractive place in which to live, work and invest. As part of the Plan, the City will devote $1.5 billion over 10 years to capital improvements, blight removal and equipment and technology upgrades. This investment will result in improved services and public safety and the clearance of blighted and abandoned properties. Up to $500 million of the $1.5 billion will be dedicated to blight removal over the next five years.
The anticipated recovery for creditors is related to the limited resources the City has to pay, consistent with its responsibility to provide municipal services to its residents. The Plan generally proposes to provide unsecured, non-retiree creditors with (i) an approximately 20% recovery on their claims in the form of new securities to be issued by the City and (ii) a potential increase to that recovery through sharing in substantially increased revenues realized by a revitalized City.
"My advisers and I have now expended many months in negotiations, including within Bankruptcy Court-mandated mediations, with all classes of creditors to get to this point, and we are satisfied with the progress made thus far," said Mr. Orr. "However, there is still much work in front of all of us to continue the recovery from a decades-long downward spiral. We must move swiftly to emerge from bankruptcy so that the financial distress harming the City can end. We maintain that the Plan provides the best path forward for all parties to resolve their respective issues and for Detroit to become once again a city in which people want to invest, live and work."
The Plan also protects retirees, including those on fixed and limited incomes. The Plan assumes that a settlement is reached with respect to the City's art assets that would permit $465 million in funding to flow from third party donors and the DIA Corp. into the City's two pension funds over 20 years, subject to the negotiation of definitive agreements and the City's and the Retirement Funds' compliance with certain conditions. The Plan also assumes that the State of Michigan ("State") will contribute up to $350 million to the City's two pension funds over 20 years under certain settlement conditions. It is expected that certain of the settlement funds anticipated to be provided by the State will be reserved to ensure that retirees whose household income is at or relatively near the federal poverty level will not fall below that level. This is to ensure that retirees can continue to meet their needs and maintain their current quality of life.
Although pensions still need to be reduced even in light of these significant outside funds, if police and fire retirees agree to the Plan and a proposed settlement with the State, they would likely receive in excess of 90% of their earned pensions after elimination of cost of living allowances. General retirees who agree to the Plan and a proposed settlement with the State would likely receive in excess of 70% of their pensions after elimination of cost of living allowances. Detroit's current employees would continue to earn pensions payable in the future under traditional defined benefit formulas rather than defined contribution arrangements. Moreover, the two pension funds would operate under more conservative investment return assumptions, which will result in pension contribution predictability and stability – critical elements as the City must be assured that it will have sufficient funds for operations and its $1.5 billion investment program in the future.
The City's filing of the Plan will continue its momentum toward reaching agreements with its key creditors and, to that end, Mr. Orr and his advisers intend to continue their commitment to the federal mediation process led by Chief U.S. District Judge Gerald Rosen and his team of mediators. Discussions surrounding a costly interest-rate swaps agreement and the formation of a regional water and sewer agency are ongoing.
A summary of the Plan, along with additional information and links relating to the Chapter 9 case, can be found at http://www.detroitmi.gov/EmergencyManager.aspx. Bankruptcy Court filings are available online, free of charge, at http://kccllc.net/Detroit.
Miller Buckfire & Co., Jones Day, Ernst & Young and Conway MacKenzie Inc. are advising the City of Detroit on its restructuring.
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