Detroit Retirees Approve Pension and Health Care Cuts
By Nathan Bomey and Matt Helms
Detroit retirees voted to accept pension cuts and allow the Detroit Institute of Arts to spin off as an independent institution, reflecting a critical endorsement of the city's restructuring blueprint to resolve the largest municipal bankruptcy in U.S. history.
With all votes counted, the two separate classes of pensioners -- civilians and police and fire -- voted "yes" to back the grand bargain, giving the city significant momentum in its fight against holdout financial creditors.
"The voting shows strong support for the city's plan to adjust its debts and for the investment necessary to provide essential services and put Detroit on secure financial footing," Detroit emergency manager Kevyn Orr said in a statement. "I want to thank city retirees and active employees who voted forcasting aside the rhetoric and making an informed positive decision about their future and the future of the City of Detroit."
The Free Press reported July 11 that pensioners appeared to have endorsed Detroit emergency manager Kevyn Orr's plan of adjustment barring an unexpected last-minute surge of "no" votes. Full results of the vote were released at about 11:30 p.m. Monday.
Police and fire pensioners voted yes by a margin of 82-18, while civilian pensioners voted yes by a margin of 73-27, according to an affidavit filed in Bankruptcy Court by the city's California-based balloting agent. The legal threshold for a "yes" vote was approval from a majority of voters representing more than two-thirds of the pension debt.
In a separate ballot, retirees also voted to approve a 90% reduction in their health care benefits in what some experts viewed as an unexpected win for the city because there was little legal incentive for retirees to approve those cuts. They backed those cuts by a margin of 88-12.
The vote marks a significant win for several nonprofit foundations that pledged $366 million over 20 years to reduce pension cuts and preserve the DIA -- forming a grand bargain that now also includes a $100-million pledge from the DIA and $195 million upfront from the State of Michigan.
It marks another step toward solidifying the future of the DIA, which would be transferred to an independent charitable trust as part of the grand bargain to reduce pension cuts and save the museum from a potential sale to pay off the city's debts.
"The city's got to be happy," University of Michigan bankruptcy law professor John Pottow said in an interview after the results were released. "Kevyn Orr's got to be having a little celebration tonight. It's not over yet. They've got to go to court and have another fight. But the big pieces are falling into place. This is exactly what Judge Rhodes is going to want to see."
Civilian pensioners accepted 4.5% cuts to their monthly checks, an elimination in annual cost-of-living-adjustment (COLA) increases and a claw back of excessive annuity payments. Police and fire pensioners accepted no cuts to their monthly checks and a reduction in COLA from 2.25% to 1%.
With a "no" vote, the grand bargain could have collapsed, potentially leading to cuts of as much as 27% for civilian retirees unless they successfully pursued a liquidation of DIA property.
Still, several obstacles linger for the bankruptcy. For one thing, 119 classes of Detroit Water and Sewer Department secured bondholders voted "no," compared to 32 that voted "yes," presenting a legal hurdle for the city. They voted "no," even though they will be paid 100% of their principal, because they are mad at the city's plan to redeem their bonds early.
The city is expected to continue negotiations with the water and sewer investors in a bid to reach a settlement that could resolve their differences.
Four groups of unsecured creditors voted "no" -- including the stiffest of opponents, a group of bond insurers and hedge funds that control $1.4 billion in pension debt issued by Mayor Kwame Kilpatrick's administration in 2005.
"I don't think anyone's surprised by this," U-M's Pottow said. "Everyone knew the bonds were going to vote no. The big battle we're going to have looming is going to be the bondholders. They're going to say you can't pay these pensions better than us."
Smaller unsecured creditors, including people who sued the city and are owed settlements, also voted "no."
The Chapter 9 bankruptcy will now proceed to its final stage: a massive confirmation trial starting Aug. 14 to decide whether the plan is fair, legal and feasible.
Judge Steven Rhodes will weigh evidence and hear witness testimony to decide whether to approve Orr's plan to slash more than $7 billion of Detroit's unsecured debt and to reinvest $1.7 billion over 10 years in public protection, blight removal and technology upgrades.
He could force the unsecured classes of creditors that voted "no" to accept cuts anyway.
But a group of holdout financial creditors could still derail the plan of adjustment. Bond insurers Syncora and Financial Guaranty Insurance Co. (FGIC) have vigorously contested the city's plan, accusing the city of discriminating against them in favor of pensioners. They could lose billions on the Kilpatrick debt, which they insured.
Another set of objecting creditors emerged earlier this month: five hedge funds that have acquired $750 million of distressed Detroit debt. They are also opposing the city's plan.
Unless the city reaches a settlement with the financial creditors -- which would currently get anywhere from 0 to 10 cents on the dollar for their debt -- Rhodes will have to decide whether to force them to accept cuts.
The financial creditors argue that the grand bargain is illegally constructed to benefit pensioners and diminish the value of the DIA art. They want the city to consider a sale of the city-owned DIA or some of its artwork.
More than 600 individual pensioners also filed official objections to the city's plan of adjustment.
Cliff Ford, a 68-year-old retiree from the Detroit Fire Department, said he is "absolutely livid" that he was not allowed to vote on Orr's appointment as emergency manager but he was urged to vote in favor of pension cuts.
"I am extremely displeased with the stated outcome of the vote," Ford said in an interview before the final results were revealed. "Never in my life have I had this same sense of helplessness that I have now. It's as if the whole world has gone mad."
Left unanswered for now is whether the plan of adjustment is legal, fair and feasible. Judge Rhodes will answer those questions following the trial, which could stretch into late September.
If Rhodes approves city's restructuring plan, the city could exit bankruptcy as soon as October.
Matt Fabian, managing director of Municipal Market Advisors, said it makes sense that pensioners accepted the plan of adjustment because of the emergence of the grand bargain.
"They're getting an awful lot of money," Fabian said. "It was not surprising. The pensioners are getting the best treatment out of any of the creditors."
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