In many ways the city of Detroit is the city of no!
When the city spent more than it took in for at least a generation, the collective cry was "no" to budget cutting. When it became clear the city was getting broker by the day and the state moved for a consent agreement the usual suspects said "hell no." When the state started intimating it might send an emergency manager you recall the infamous “we will burn this city down before we let that happen."
Then the bankruptcy came and the steady drumbeat of "no, no and no-er" was proclaimed from every corner when it came to pension and healthcare cuts showing up in the bankruptcy plan. Now we are just weeks away from the ballots going out for the unsecured creditors to vote on Kevyn Orr’s plan of adjustment and there is somehow some faint hope that the "oh-no" chorus will change its tune. That is a tall order.
Yet that is where we are in the bankruptcy proceedings. Kevyn Orr has put out an amended disclosure statement that is supposed to tell all the unsecured creditors how he plans on remaking the city. It offers very tough cuts.
But in stepped a dozen national charitable foundations, the DIA and Gov. Rick Snyder with the “grand bargain." It’s more than $800 million offered to pensioners and current employees, who hope one day to get their pension for free. Yes, nearly a billion dollars has been offered to sweeten the pot and help pensioners get more than they otherwise would in this historic bankruptcy. How could you possibly say no, right? Well, think again.
The money comes with strings. As part of the grand bargain, Kevyn Orr must remake the pension systems so they are run correctly. It came out yesterday that the Annuity Savings Plan was so mismanaged over the years that the city will be looking to “claw back” or recover $400 million from those receiving checks or received checks to pay the pension system back. It was criminal but happened not so long ago that the statute of limitations has run out. If you donate hundreds of millions of dollars it’s usual to attach such strings so you don’t have to come back and hand over that kind of cash again. Also, part of the grand bargain is the requirement that both pension groups -- the police and fire and the general retirement system -- agree to the plan of adjustment; not one, both.
Making this more precarious is the requirement that the State of Michigan Legislature agree to send $350 million Detroit’s way. This is no lead-pipe cinch either. They won’t vote for the money until after the pensioners vote on the plan of adjustment.
But in Lansing the pols have strings attached to the cash, too. The retirees give up the right to sue the state over the constitutional breach accomplished when Detroit filed for bankruptcy. The constitution says “hands off our pensions” and was voted on by Michigan voters. They already are suing over this issue. This mess gets murkier by the day.
On top of this, Kevyn Orr wants to create a VEBA or healthcare trust like GM and Chrysler did in their bankruptcies for healthcare. This will mean significant cuts in health benefit as well. The ballots for this vote go out in three weeks. A yes vote means a pension cut, 6 percent for police and fire and 26 percent for general retirement. A no vote means a 14 percent cut for police and fire and 34 percent for the general system. So, Kevyn Orr is saying the only good answer is to take the grand bargain. You are probably shocked to hear there are those on the pensioner side saying no to this. Whether they prevail is the key question.
Meanwhile, Oakland and Macomb counties filed objections with the bankruptcy court over the Water and Sewer Department Regional Authority situation. Kevyn Orr is counting on $47 million a year for this and it is nowhere near a done deal and going with a private company comes with myriad problems. The bondholders are angry the pensioners are likely to get more than they do. Right now their haircut is at 85 percent and they don’t like it seeing pensioners getting 50 to 60 percent more than they do when bankruptcy law requires equal treatment for unsecured creditors. There are objections to the disclosure statement that I am told are legitimate. This whole situation right now has a lot of moving parts that appear up on stilts and leaning toward deep and troubled water.
Should we be worried? Well, consider this problem that in many ways is Detroit in a nutshell. Kevyn Orr’s tenure will end on September 15th. He will be voted out by City Council. But as of this week Orr is saying the city will not be out of bankruptcy at least until October 15th. That’s a month or more where the city is in a financial emergency because bankruptcy by definition is an emergency.
So, if Kevyn Orr is gone, then what? Under P.A. 436, the emergency manager law, the governor is supposed to replace him. Who will he pick? Many believe he will default to Mike Duggan which Duggan says he is on board with. But what if the governor isn’t thinking along those lines? This whole bankruptcy appears ready to spiral into the abyss. There are so many problems and so few easy answers. This looks like an unsolvable, monumental mess.
Still, those who know bankruptcy, such as Local 4’s experts Doug Bernstein and Judge Ray Reynolds Graves, say don’t worry. This is common. Judge Rhodes is watching closely and it is his job to keep this thing on track. Also, it is best to remember that the city of Detroit is broker than broke. It can’t afford much of anything and so for all of the objections, in the end the unsecured creditors are fighting over peanuts. The bankruptcy law requires the city to be able to function after it emerges.
So, our experts say cooler heads will prevail at the end of the day when this fact becomes obvious. It’s one thing to have faith in the bankruptcy process, it’s another to believe that the "oh-no" chorus will change its tune.