By Shoham Geva, Summer Managing News Editor
Published June 12, 2014
This is a piece for the Detroit Beat, a new blog at the Daily. Look for the Detroit Beat link on our website in the fall.
While filing bankruptcy can mean rebirth, there are few guarantees where the exact dollars and cents are concerned.
That’s been a lesson learned several times over in Detroit, where city officials and the city’s creditors have been grappling with tough decisions about what the city owes — and what it’s obligated to pay — for the past eleven months since its historic declaration of bankruptcy in July of last year.
However, the city’s financial struggles might have an end in sight. Last week, lawmakers in Lansing passed the final piece of the city’s plan of adjustment, dubbed the “grand bargain.” This is an unprecedented public-private partnership between donors to the Detroit Institute of Art, private foundations, and now the state’s government. This is potentially Detroit’s path out of bankruptcy.
As its contribution, the state approved roughly $195 million in aid. Private foundations have given almost $400 million in aid, and the DIA is responsible for raising 100 million, of which roughly 70% has been raised thus far, leading to a total of $816 million for the city.
The plan still has to be approved by pensioners, who have until July 11th to vote, and by federal judge Steven Rhodes, who has presided over the negotiations.
University professor John Pottow, an expert on bankruptcy law, said while it might not always make sense for entities like the state to get involved in bankrupt cities, in this particular case the prominence of Detroit within Michigan eventually compelled action.
“At a certain point, the economies in the state are so interwoven that Michigan has to stand by Detroit,” he said. “And so while it may have seemed initially unexpected, it was perhaps inevitable that the state would have to come and step in.”
The deal, which was put together by Detroit’s emergency manager Kevyn Orr, primarily seeks to address two of the core disputes that have been at the heart of the negotiations: pensioners and the Detroit Institute of Art.
Pensioners, who represent one of the city’s largest financial obligations along with banks and bondholders, have been a constant presence from the beginning of the bankruptcy process. When the city filed its original plan of adjustment in March — essentially, a blueprint for how the city planned to navigate out of bankruptcy and the estimated $18 billion deficit — pensioners were eligible to receive 66 percent of what was owed to them if they were former general city employees, or 90 percent of what was owed to them if they were former fire or police employees. Both figures led to outcry from the city’s two pension boards, who thought the city could provide more.
In a statement at the time, the city’s police and fire pension board said they believed there were other, more rational options.
“We believe the City of Detroit can afford much better treatment of its pension beneficiaries who dedicated years of their lives in service of the city,” the statement read.
Under the current grand bargain, which has received support from the city’s two pension boards, general pensioners are now facing a 4.5% cut, as well as the loss of the cost of living adjustments. Fire and police pensioners will maintain their base pensions, but will lose 55% of the cost of living adjustment.
The DIA, which has been the other main contentious issue in the negotiations, was brought into the picture after several other creditors, mostly bondholders and banks who stand to lose millions of dollars under the current plans, began an effort to force the city to sell off works in the DIA to raise more revenue for covering debt.
As part of the grand bargain, the Detroit City Council voted last week to move the DIA into a public trust, which is meant to remove the possibility its art could be sold off.
Pottow said, though lengthy negotiations between creditors and debtors are common, what distinguishes Chapter 9 bankruptcies negotiations like Detroit from the more typical Chapter 11 bankruptcies used for businesses is the level of uncertainty.
“When a Chapter 11 fails, we know exactly what happens — you liquidate the company, and it gets sold, so people know what’s standing behind the door,” he said. “Here, we’re not really sure what happens if a Chapter 9 fails. We know you can’t draw blood from a stone — you can’t force a city to pass a tax — so the bondholders for example, or the pensioners, aren’t really sure what they get if this thing fails.”
Orr’s office, as well as other proponents of the grand bargain, has said pensioners stand to lose more of their pensions if they vote against the grand bargain.
Rep. Jeff Irwin (D-Ann Arbor) said while his vote was motivated by a belief that Detroit’s success is critical to Michigan’s success, that uncertainty, and potential ensuing liability for the state, was a common theme during the grand bargain vote, and what may have spurred the state to become involved.
“If the pensioners are left to the bankruptcy process without this kind of bargain and they were hit really hard on their pensions — if instead of getting 90% on their pensions they got 20% or 40% of their pensions — many of those individuals would actually be getting such a small pension that they would be eligible for significant state assistance,” Irwin said.
Until mid-July, when the results of the pensioners’ vote comes in, it’s unclear what will happen to the city’s bankruptcy, and whether a resolution is in the near future after eleven months of deliberations.
However, Craig Regester, associate director of the University’s Detroit Center, said even as the city waits to see what's lying ahead, it’s important to remember that the status of Detroit's bankruptcy doesn't necessarily define everything about the city.
“There’s a lot happening here, and there has been a lot happening in Detroit for a long time, and there continues to be, at the neighborhood level, at the arts and culture musical level, “ Regester said. “The city has life, and is alive in spite of the financial formulation. It doesn’t mean it doesn’t have real impact. It’s sort of a contradictory formulation — how our garbage is picked up, whether or not we’re going to have a water authority, how many people will actually get to work for the city of Detroit, whether or not we’ll have a jobs program. All those big questions exist simultaneously.”