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Judge Clears Detroit's Way for Exiting Historic Bankruptcy

A federal judge on Friday approved a plan to end Detroit's historic Chapter 9 bankruptcy, giving the Motor City an unprecedented shot at recovering from decades of economic despair and municipal mismanagement that left the city awash in debt and struggling to provide basic public services.

By Nathan Bomey, Matt Helms and Joe Guillen

A federal judge on Friday approved a plan to end Detroit's historic Chapter 9 bankruptcy, giving the Motor City an unprecedented shot at recovering from decades of economic despair and municipal mismanagement that left the city awash in debt and struggling to provide basic public services.

Judge Steven Rhodes ruled that Detroit's comprehensive restructuring plan is fair and feasible, providing the legal authority for the city to slash more than $7 billion in unsecured liabilities and reinvest $1.4 billion over 10 years in public services and blight removal.

With Rhodes' decision, the city is expected to cut about 74 percent of its unsecured debt, freeing up significant cash to reinvest in services. The plan also projects potential cost savings through more efficient government operations that could increase the reinvestment plan to $1.7 billion.

The historic ruling puts an end to the largest municipal bankruptcy in U.S. history, with all of the city's major creditors agreeing to support the plan of adjustment. The city is expected to officially emerge from bankruptcy within weeks.

The city's bankruptcy filing on July 18, 2013, brought international attention to the city's plight, shining a spotlight on a ruinous cycle of borrowing and spending that failed to reverse the effects of a stunning economic contraction over the last half century.

Detroit emergency manager Kevyn Orr filed for federal bankruptcy protection on behalf of the city with the approval of Gov. Rick Snyder, a Republican who appointed the former Washington, D.C., lawyer and fellow University of Michigan graduate in March 2013 to repair the city's finances and operations.

To balance the books, Orr almost immediately threatened steep cuts to pensions and retiree health care, insinuated the city might have to sell Detroit Institute of Arts treasures and infuriated Wall Street with a proposal to aggressively slash bonds.

But after Rhodes ruled in December that the city was eligible for bankruptcy and that pensions could be cut, the tone of the city's talks with creditors shifted.

The emergence of a deal to reduce pension cuts and preserve the Detroit Institute of Arts _ which the Free Press dubbed the grand bargain _ helped soothe the objections of retirees and unions who spent the first half of the case fighting pension cuts by claiming they were protected under the state constitution.

The grand bargain will allow the city to accept $816 million over 20 years from nonprofit foundations, the State of Michigan and Institute of Arts donors to reduce pension cuts and save the museum as an independent institution.

The Institute of Arts, which waged a fierce fight against any potential sale, will not have to sell a single piece of art to pay off the city's debts or reinvest in services.

Several major financial creditors, including bond insurers Syncora and Financial Guaranty Insurance Co., argued repeatedly during the case that the grand bargain was illegal because it favored pensioners over other creditors.

But they dropped their objections after reaching settlements in the middle of a 24-day trial featuring 41 witnesses and 2,327 exhibits on the viability of the city's plan of adjustment. Both wound up with cash and city-owned property as part of their settlements.

All the city's major creditors backed the plan, including the U.S. government-appointed Official Committee of Retirees, the city's two pension funds, two major retiree associations, all of the city's unions and two global banks, UBS and Bank of America Merrill Lynch.

General pensioners will get 4.5 percent cuts to their monthly checks, the elimination of annual cost-of-living-adjustment increases and a clawback in excessive interest from annuity savings. Police and fire pensioners would get a reduction in their cost-of-living increases.

Pensioners voted overwhelmingly to accept the deal during a 60-day balloting process this summer.

The bankruptcy's conclusion also marks the end of Orr's tenure in Detroit. As emergency manager, he retained control of the city's operations for 18 months, but he handed power over to Mayor Mike Duggan and the City Council in September while maintaining control of the bankruptcy case.

But the city will not obtain complete autonomy for at least a decade. The state Legislature and the governor approved a Financial Review Commission _ mostly controlled by gubernatorial appointees _ to oversee the city's finances. In addition, an investment committee will oversee decisions made by the city's two pension boards.

The board will have the power to veto the city's spending and borrowing decisions, which Orr has described as crucial to giving investors confidence that the city won't slip back into bankruptcy.


(c)2014 Detroit Free Press

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