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 The potentially precedent-setting plan the city filed in U.S.
Bankruptcy Court on Friday would cut retired worker's pensions by up
to 30 percent while owners of bonds deemed unsecured would lose up
to 80 percent of their investment.
The fact that voter-approved general obligation bonds were lumped
into the city's $12 billion unsecured debt pile has roiled the U.S.
municipal bond market.
Retirees and pension funds argued the proposed cuts go too deep,
while bond insurers complained that bondholders were being treated
unfairly and forced to bear most of the losses.
Kevyn Orr, the city's state-appointed emergency manager,
acknowledged that the plan is far from final, and will be subject to
negotiation in the weeks ahead.
"You're hearing the yin-yang, the Alpha and Omega of reaction,
that's pretty clear," Orr said during a conference call with
reporters to discuss the plan.
The plan to exit bankruptcy marks a watershed in Detroit's case, the
largest municipal bankruptcy in U.S. history. Creditors must now
either accept the settlement or negotiate another solution. The
ultimate decision will rest with U.S. Bankruptcy Judge Steven Rhodes
who will determine if the final deal Detroit strikes with a majority
of creditors is fair and feasible.
In addition to digging Detroit out of debt by Orr's self-imposed
deadline of September, the plan also outlines how to restore the
city to place where people want to live and businesses want to
operate.
Orr's plan calls for spending $1.5 billion to improve essential
services and public safety over 10 years, with up to $500 million
earmarked for blight removal in a city where about 20 percent of the
housing stock is abandoned.
Even as Detroit tries to emerge from bankruptcy, the city's pension
funds and unions continue to argue in court that Detroit should not
even be eligible for bankruptcy.
On Friday, a U.S. Appeals Court in Cincinnati said it will hear
their arguments, although no date was set.
RETIREES SEE PENSION CUTS OF 50 PERCENT
The cuts to worker pensions would have been even deeper except for
$815 million pledged by philanthropic foundations, the Detroit
Institute of Arts and Michigan Governor Rick Snyder to prop up the
pension funds and avoid a fire sale of city-owned artwork.
Police and fire retirees who agree to the plan would see their
benefits cut by just 10 percent, but cuts for other retirees would
be around 30 percent, according to a statement from the city.
A committee representing retirees says the city's cuts would go even
deeper and reduce some pensions by 50 percent, forcing some retirees
below the poverty line.
"The city's plan, if actually confirmed in its current form, would
cause significant harm to retirees, their spouses and dependents,"
said Terri Renshaw, chair of the retiree committee. "Many retirees
who live on the edge will fall below the poverty line. Everyone else
will see major cuts to their pension checks and health care
coverage."
A spokesman for the police and fire retirement fund, Bruce Babiarz,
also blasted the pension cuts, but said the fund will continue
negotiating with the city.
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Orr's plan also includes changes to the way Detroit's two retirement
systems, the city's largest unsecured creditors, forecast the rate
of return on their investments. Orr proposes reducing the assumed
rate of return on investments by the funds from 8 percent to 6.5
percent for the police and fire fund and from 7.9 percent to 6.25
percent for the general retirement system. The reduction is a tacit
acknowledgement that overly optimistic prior assumptions led to
chronic underfunding of the pension systems.
BIG HAIRCUT FOR BONDS
In the restructuring proposal, Orr formalized earlier plans to treat
about $641 million of unlimited and limited tax general obligation
bonds outstanding as of June 2012 as unsecured debt. The city has
already defaulted on some of the mostly insured debt and the plan
would force bondholders to accept an 80 percent cut in their claims,
with a 20 percent payout made in the form of notes issued by
Detroit.
Some $440 million of general obligation bonds would be considered
secured debt.
The significant haircut and treatment of general obligation bonds as
unsecured debt likely will upset participants in the $3.7 trillion
municipal bond market, where such bonds have long been considered a
safe bet for investors. Some have warned investors will demand to be
paid more to lend to Detroit and other local Michigan governments
and school districts.
"We believe this is contrary to bankruptcy law and will result in
costly litigation that will hamper the city's emergence from
bankruptcy," said Steve Spencer, a financial adviser to bond insurer
Financial Guaranty Insurance Co, regarding the uneven treatment of
pensions and bonds in the plan.
Lisa Washburn, a managing director at Municipal Market Advisors,
said the cuts to the GO bonds are "greater than anything we've ever
seen and that the market has ever anticipated."
But Domenic Vonella, an analyst at Municipal Market Data, said the
risk has been priced in to Detroit bonds. "That's why they'd been
trading cents on the dollars," he said.
Under the plan, bondholders and other unsecured creditors would
potentially share in any increased revenue that results from
Detroit's revitalization, according to the city.
Detroit's water and sewer bonds, which Orr considered secured debt,
would be replaced with new debt under the plan.
A deal to end costly interest-rate hedges on $1.45 billion of
pension debt was not included in the plan. But Orr told reporters
that a third proposed resolution will be presented to the bankruptcy
judge in the next few days that will have a significantly lower cost
for Detroit than the first two deals the judge rejected.
(Reporting by Karen Pierog in Chicago, Lisa Lambert in Washington
and Hilary Russ, Ed Krudy, Steven Johnson, Nick Brown in New York,
Bernie Woodall in Detroit, and Rachel Jackson in Ann Arbor; editing
by David Greising, Steven C. Johnson, James Dalgleish, Matthew Lewis
and Lisa Shumaker)
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