Is Detroit's ‘grand bargain’ even legal?
State lawmakers debate a historic $195 million settlement to shore up Detroit’s pension funds and save the DIA’s art collection.
Published: May 20, 2014
Keith Davis, speaking before a group of lawmakers who could determine his future, explained why he opposes a plan that would help settle Detroit’s historic bankruptcy.
A retiree who worked 31 years in Detroit’s water department, Davis said the $195 million one-time infusion of cash from Michigan’s rainy-day fund doesn’t do enough to ameliorate the cuts pensioners face under the city’s currently proposed bankruptcy-exit plan, called a “Plan of Adjustment.”
“Our choice is the deep blue sea with a heavy stone around our necks, or burning in hell,” Davis told the five members of the newly formed state House committee on Detroit’s Recovery and Michigan’s Future last week.
“I’d rather go down swinging.”
Davis’ remarks fell on the House committee’s third day of hearings regarding the $195 million settlement, the last piece needed to allow an $816 million so-called “grand bargain” to move forward. The unprecedented proposal seeks to shore up Detroit’s pension funds and save the Detroit Institute of Arts’ collection from a possible fire sale in bankruptcy court.
If the state legislature ultimately rejects the plan, a pledged $366 million from foundations and $100 million from the Detroit Institute of Arts would likely vanish, Detroit Emergency Manager Kevyn Orr told the panel earlier in the week.
Without the money, by Orr’s estimate, the cuts would be drastic: Detroit police and fire retirees who receive an average $30,000 annual pension would be cut to around $20,000 per year. For general retirees, an average $19,000 a year pension could fall to around $12,000. Besides that, the Detroit Institute of Arts’ collection could be sold off, with the proceeds being split evenly among all creditors, not just pensioners, Orr said.
(Under municipal bankruptcy law, a city can’t be forced to sell its assets, like the DIA’s collection. But, if the grand bargain vanishes, or Judge Steven Rhodes rejects Orr’s bankruptcy-exit plan, the emergency manager could be forced to sell art.)
That’s why the $816 million proposal has captured national interest. It’s a remarkable deal to potentially settle an unfortunate situation.
The genesis of the deal happened during negotiations with Detroit’s creditors last fall, when Detroit’s bankruptcy was green-lighted. That’s when U.S. Bankruptcy Judge Steven Rhodes ruled pensions could be impaired. To lessen the blow to pensioners, a federal mediator appointed to the case quickly crafted the beginnings of the proposal, which would also transfer the DIA from city ownership to a new nonprofit.
But, even with the infusion of $816 million, the Plan of Adjustment submitted by Orr still implements cuts to pensions — call it a “modest bargain.”
General retirees, who on average receive a $19,000 annual pension, would take a 4.5 percent trim, with their cost of living adjustments (COLA) wiped out. Police and fire retirees, who on average receive a $30,000 annual pension, would take no cuts to their monthly checks, but their COLA would be reduced to about 1 percent, down from about 2.25 percent.
And, for some, the hit may be steeper: The city is proposing to “claw back” almost $230 million from roughly 4,800 general retirees who received interest payments from its pension fund, according to bankruptcy court documents. The blow to those retirees could tack on an additional 15 percent cut to their monthly checks.
That’s why Davis and other retirees who spoke before the House committee said they would rather fight for their right to a fully funded pension, as enshrined in Michigan’s constitution. An appeal on Judge Rhodes’ ruling that Detroit is eligible for bankruptcy was granted by the U.S. 6th Circuit Court of Appeals, but has yet to be heard. If the state approves the $195 million settlement and Rhodes approves Detroit’s bankruptcy-exit plan, that appeal would likely be dropped.
But consider this: What if the grand bargain isn’t even legal? Can the state, DIA, and foundations actually pump more than $800 million into Detroit’s coffers solely for the benefit of pensioners — nearly making the funds whole — while some of the city’s bond insurers stand to recoup 10 to 20 cents on the dollar?
Perhaps surprisingly, the answer is entirely unknown. The novel municipal bankruptcy code makes it almost impossible to determine, leaving most outcomes of Detroit’s historic case open to conjecture.
The test, bankruptcy experts say, is that a Plan of Adjustment cannot unfairly discriminate against a class of creditors, and it must be in the best interests of all creditors.
Orr’s team clearly believes the law allows the $816 million to be funneled into one purpose, in Detroit’s case, to boost pension funds.
Bond insurers, who stand to lose hundreds of millions of dollars under the bankruptcy-exit plan, believe the law says otherwise.
And with so few cases guiding Rhodes in his decision making process, both sides have a legal argument to make, bankruptcy experts told Metro Times.
The most publicized assertion that Detroit’s grand bargain was potentially illegal came earlier this month in a Washington Post op-ed written by David Skeel, a bankruptcy law professor at the University of Pennsylvania.
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