Calling Detroit’s woeful public services “inhumane and intolerable,” a federal judge on Friday approved the city’s restructuring proposal to exit bankruptcy — a plan that officials say gives the city an opportunity to grow and become viable once again.
The proposal, called a "Plan of Adjustment," could go into effect within the next 30-60 days. Rhodes' decision comes less than 16 months after Detroit filed for protection under Chapter 9 of the Federal bankruptcy code.
Rhodes dissected his reasoning for signing off on Detroit's eighth amended Plan of Adjustment piece-by-piece over the course of a 105-minute ruling.
In explaining his opinion, Rhodes called the so-called "Grand Bargain," the "cornerstone" of Detroit's restructuring proposal. That's a roughly $660 million deal to shore up Detroit's pensions, with funds from the state Legislature, multiple local foundations, and the Detroit Institute of Arts. Under the deal, the DIA's collection will be spun off to a nonprofit and salvaged from a potential sale.
The DIA is an “invaluable beacon of culture," Rhodes said.
Early on, Rhodes also addressed the contentious issue of impairing Detroit's pensions, a protection enshrined in Michigan's Constitution.
"The court held that the federal bankruptcy power could impair pension rights in bankruptcy case, even if a state Constitution protects them," says Rhodes. "The court stands by that position."
He added: "The court finds that the pension settlement is a reasonable settlement."
A handful of pensioners seated in the back of the media room on the first floor of the federal courthouse in downtown Detroit had visibly negative reaction to Rhodes decision on the pensions.
When Rhodes overruled objections to Detroit’s proposal to claw back some $190 million excess interest paid into some retirees' annuity accounts, one pensioner said aloud, “Shocking.”
Fraught with questionable circumstances in the run-up to filing the largest municipal bankruptcy in the nation's history, Rhodes decision will allow Detroit to shed some $7 billion in debt through its complex restructuring proposal — and emerge from bankruptcy court protection.
Rhodes has ruled that Detroit's plan was feasible and legal under federal bankruptcy code, meaning it treated all of its nearly 100,000 creditors fairly and in their best interest.
Retirees, who face an unprecedented hit to their monthly pension checks under Emergency Manager Kevyn Orr's bankruptcy-exit plan, will learn if Rhodes agrees that Detroit can reduce those pensions, despite having the protection enshrined in Michigan's Constitution. Rhodes says he will issue a written opinion at a later date.
The city's case moved at an astonishing pace, with experts initially expecting the bankruptcy petition could drag on for years. In other cases, Vallejo, Calif. spent three years in bankruptcy; Stockton, Calif. spent just over two years in court. Through numerous mediation sessions, the city secured a number of settlements from some of the city's most contentious creditors.
Interestingly, Rhodes ordered additional mediation to discuss the "reasonableness" of Detroit's legal fees, a fact that's . The city's legal team, led by Orr's former law firm Jones Day, will reportedly end up costing Detroit $150 million when the case wraps.
But what's interesting about this moment is the fact that Detroit's retirees, it would appear, shoulder nearly 80 percent of the $7 billion Orr hopes to shed. That's what Curt Guyette, investigative reporter for the American Civil Liberties Union, reported in this week's Metro Times.
Because the numbers are indeed slippery, it is not possible to put an exact figure on how much of that is going to come out of the pockets of retirees. It is possible, however, to get some idea of how much they are going to be hurt financially.
The biggest hit comes in the form of health care cuts, which have already been instituted as a result of actions taken by Orr. Instead of being enrolled in health insurance plans where they pay 20 percent of the cost and the city picks up the rest, the vast majority of retirees are now receiving $125 monthly stipends (some, such as police and firefighters injured on the job, receive as much as $400.)
That reduction is the single largest "debt" the city will be shedding – about $4 billion.
And, Guyette noted, cuts to retirees cost-of-living-adjustments (COLA) for their pensions will shed a total of more than $1.3 billion. On top of that, the recoupment of alleged over-payments into annuity savings accounts for thousands of workers, called a "claw-back," will also take more than $190 million.
Those kind of cuts, even with nearly $660 million from foundations, the state Legislature, and the Detroit Institute of Arts, pledged solely to shore up pensions.
A key component of Rhodes' decision rested on whether that money can legally be used only for the purpose of shoring up Detroit's pensions.
Rhodes spent nearly 10 minutes riffing on why he believed the DIA was of the utmost importance to the city's future viability.
"To sell the DIA art would be to forfeit Detroit's future," he said.
A press conference with Chief U.S. District Judge Gerald Rosen, Republican Gov. Rick Snyder, Orr, and Detroit Mayor Mike Duggan was scheduled 30 minutes after Rhodes' finishes his ruling.
With those proposed cuts in place, Orr has said the city will free up as much s $1.7 billion to reinvest in city services, of which about $500 million would go toward blight removal. In September, who was appointed emergency manager with near unprecedented control of the city's finances in March of 2013, ceded authority of Detroit's day-to-day operations.
But that figure isn't necessarily a slam-dunk: Martha Kopacz, an expert picked by Rhodes to determine whether Detroit's bankruptcy-exit plan was feasible, testified last month that Detroit's plan was feasible, but that it has no wiggle room with its budget.
Kopacz criticized the city's fast pace to exit bankruptcy and said Detroit was "at the edge" of its ability "to repay $275 million the city plans to borrow to finance its exit from bankruptcy," Reuters notes. Following Rhodes' ruling, Standard & Poors analysts said the success of Detroit's plan remains "in question."
"Although the roadmap is set out in the plan of adjustment, it will still likely be difficult for the city to continue making the kinds of changes that will lead to the cost savings it needs to be operationally balanced," said Jane Ridley, S&P analyst, in a statement. "We believe that achieving this is the only way that Detroit will be able to stay out of bankruptcy again in the future."
Rhodes implored the state Legislature to ensure that pensions of Michigan's municipalities are adequately funded. If not, this ruling would be in vain, he said.
"If the state fails, history will prove that the court's approval was a massive mistake," Rhodes said.
Rhodes' 50-page oral ruling can be viewed below.
