After Fresh Settlement, Detroit Judge to Consider Plan
CHICAGO — The judge overseeing Detroit's bankruptcy will consider approval of a key exit bankruptcy document Monday that includes a fresh settlement that retirees and the city reached late Friday.
U.S. Bankruptcy Judge Steven Rhodes will review for final approval the city's disclosure statement, the narrative document that accompanies its plan of debt adjustment.
Detroit filed the latest plan and disclosure statement Friday after it reached agreement with a committee representing roughly 22,000 retirees concerning the city's other post-employment benefit liabilities.
The OPEBs, which are benefits other than pensions, and are considered among the least secure of the city's estimated $18 billion of debt
The deal calls for the retirees to recover less than 13% of the OPEBs, but limits the city's proposed cuts.
It's the latest in a series of agreements between the bankrupt city and its creditors.
In recent weeks, Detroit has nailed deals with its unlimited-tax general obligation bondholders through the bonds' insurers, and over police, fire and general employees' pensions. Unlimited-tax GO bondholders would see a 74% recovery though the insurers will make full on-time payments to bondholders.
Police and fire workers would have no pension cuts and 55% cost-of-living increase reductions and general employees would have their pensions cut 4.5% and total elimination of their COLA benefits.
No settlements have yet been reached with the city's limited-tax GO holders, the holders of $1.4 billion of pension certificates of participation, insurers Financial Guarantee Insurance Co. and Syncora Guarantee, or the unions representing employees.
The city late Friday announced the deal with the nine-member, court-appointed retiree committee. The agreement calls for the retirees to recover only 10% to 13% of their retiree health care benefits, according to the latest disclosure statement. The city will increase to $450 million from less than $300 million the amount it puts into a health benefits account, and has also agreed to cap to 20% the amount of annuity money it will try to claw back from retirees who may have been overpaid by the retirement systems.
"It is fair, we believe, and puts the city that much closer to emerging from bankruptcy solvent, more credit-worthy and better able to provide basic services to its nearly 700,000 residents," emergency manager Kevyn Orr said in a statement.
The city had estimated its unfunded other post-employment benefit liability at $3.7 billion, while the retiree committee had put it at $5 billion. The settlement calls for a gross claim of $4.3 billion with an allowed claim of $4.1 billion.
The committee said it would sign off on the previously reached pension agreements and to an $820 million plan that provides a mix of state and private funds to the pension debt. The committee also agreed to suspend its appeal of Rhodes' eligibility decision.
"A settlement with this representative, which will avoid further expensive and protracted litigation of significant issues affecting the city's restructuring and revitalization, is a significant salutary result," Detroit said in its disclosure statement. "[The settlement] represents a hard-fought, arms'-length resolution of all of the issues facing the Retiree Committee's constituency in this Chapter 9 case."
As it has in its previous plans, the city said it wants to issue $650 million of general and unsecured notes when it exits bankruptcy. The notes would pay interest of 4% for the first 20 years and 6% for years 21-30. They would be interest-only for the first 10 years.
The bankruptcy document also provides a glimpse of Detroit's post-bankruptcy governance structure, increasingly considered crucial to the city's future. The city and the state of Michigan want to set up a financial oversight board to ensure that Detroit sticks to its restructuring plan. The board would be allowed to impose limits on the city's borrowing and spending.
Detroit continues to try to hammer out a deal to lease or otherwise privatize the massive Detroit Water and Sewer Department. The latest disclosure statement features a controversial provision that calls for the department to repay $428 million in DWSD pensions to the general retirement system over a nine-year period.
Details provided on the ULTGO settlement call for the Michigan Finance Authority to issue the restructured debt, and give the current holders the right to receive their pro-rata share of the restructured bonds. With bondholders in line to get 74% of the tax millage that is dedicated to the bonds, the city would receive the remaining 26%. It would distribute that portion of the levy proceeds over 14 years — to total not less than $20 million over that period — to an income stabilization fund that would go toward the poorest retirees.
At least two creditors objected Sunday to the amended disclosure statement.
Bond insurer Financial Guaranty Insurance Co. filed a limited objection. FGIC wants the city to include a description of the four statements of interest the insurer obtained last month regarding the city-owned art collection.
Macomb County objected to the statement on the grounds that it has had only a short time to review the latest filing. The county also objects to many of the statements in the document, including those about the ongoing negotiations with the city over the DWSD and the department's pension obligations.
The court's failure to approve the plan would have serious consequences, the city warned in its statement.
"Confirmation of the plan relieves the city of a substantial portion of its crushing debt burden and provides the city with the opportunity to implement the restructure initiative," the document said. "In the absence of confirmation and the fresh start it promises, the city, its stakeholders and, importantly, its residents are compelled to return to the downward spiral that produced this Chapter 9 filing."