Detroit Files Plan To Fix Debt, Leave Bankruptcy
DETROIT (WWJ/AP) – Detroit Emergency Manager Kevyn Orr has officially filed a plan to restructure the city’s $18 billion debt.
The 120 page plan, which was filed Friday in federal bankruptcy court, makes cuts to pensioners and creditors while offering a blueprint for the city to emerge from the largest municipal bankruptcy in U.S. history.
Click here to see the plan (.pdf format)
The filing calls for city pensioners to receive $4.3 billion in payments and bondholders about $1.1 billion during the next 40 years. It also details plans to help pensioners keep more of what they are owed by using state and private funds to protect art at the Detroit Institute of Arts.
“Mr. Orr and his team are confident that the filing of the Plan is the most effective and efficient method to reorganize the City’s financial affairs, provide an opportunity for the City to revitalize itself and continue efforts to once again make Detroit an attractive place in which to live, work and invest,” said a statement from Orr’s office.
The plan still faces numerous obstacles. Most aspects are still being negotiated in mediation sessions with stakeholders. Court appeals are all but certain even after the final version is approved in bankruptcy court.
“The City believes that the Plan gives the City the best chance of effectively adjusting its debts and reestablishing itself as a prosperous and productive American city. All creditors entitled to vote are encouraged to vote in favor of the Plan,” the document said.
Orr’s office said the plan “protects retirees, including those on fixed and limited incomes.” The plan calls for a 34 percent reduction to city employee pensions and 10 percent reduction for police and fire. However, Orr included a promise of millions of dollars from foundations, the state and the Detroit Institute of Arts to prevent any possible sale of city-owned pieces in the museum to bolster at-risk pensions. The city would also establish a voluntary employees’ beneficiary association that would provide health care benefits to retirees.
“Detroit’s current employees would continue to earn pensions payable in the future under traditional defined benefit formulas rather than defined contribution arrangements. Moreover, the two pension funds would operate under more conservative investment return assumptions, which will result in pension contribution predictability and stability,” Orr’s office said in a statement.
The plan also includes the possible spinoff of the city’s Water and Sewerage Department to a regional authority. The city would receive $47 million annually under a lease deal.
As part of the plan, the city will devote $1.5 billion over 10 years to capital improvements, blight removal and equipment and technology upgrades. According to Orr’s office, up to $500 million of the $1.5 billion will be dedicated to blight removal over the next five years.
The plan was accompanied by a disclosure statement, which outlines the level of reinvestment, including municipal services, planned during the next 10 years.
“We must move swiftly to emerge from bankruptcy so that the financial distress harming the City can end,” Orr said in a statement. “We maintain that the Plan provides the best path forward for all parties to resolve their respective issues and for Detroit to become once again a city in which people want to invest, live and work.”
Michigan Gov. Rick Snyder called Orr’s plan a “thoughtful, comprehensive blueprint” that will direct Detroit back to solid financial ground.
“This plan of adjustment is a critical step forward as we look to resolve problems decades in the making,” Snyder said in a statement. “There will be difficult decisions and challenges for all sides as this process moves forward. The state’s focus is on protecting and minimizing the impact on retirees, especially those on fixed, limited incomes, restoring and improving essential services for all 700,000 Detroit residents and building a foundation for the city’s long-term financial stability and economic growth.”
Orr had hoped creditors would sign off on the plan before he submitted it to U.S. Bankruptcy Judge Steven Rhodes. But the clock was ticking because Rhodes had set a March 1 deadline. Nevertheless, with negotiations ongoing, changes are expected.
Orr has said the city’s has at least $18 billion in debt. About $6 billion is Detroit Water and Sewerage Department debt, which is secured by water bill payments, while an additional $12 billion is unsecured, meaning it’s not covered by a revenue stream.
Orr’s figure also includes about $2 billion in general obligation bond debt, $5.7 billion in unfunded retire health care obligations and $3.5 billion in unfunded pension liabilities — although pension officials have disputed that figure.
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