Pensions Focus of Detroit Bankruptcy Case's Closing Arguments
By Matt Helms, Nathan Bomey and Joe Guillen
The historic hearings on whether Detroit will exit the nation's largest-ever municipal bankruptcy came to a quick end Monday after closing arguments, which were abbreviated by settlements with major creditors.
Moving the city closer to self-rule and something of a sense of normalcy, Judge Steven Rhodes said he would reveal his decision at 2 p.m. Nov. 7 after a fast-paced bankruptcy that defied predictions of drawn-out battles that could have stretched for years.
"We think we made our case and we met our burden," Detroit emergency manager Kevyn Orr said outside court after closing arguments from city lawyers, attorneys for creditors and even individuals who object to the plan.
Rhodes pressured Detroit's bankruptcy attorneys to justify better treatment for pensioners than financial creditors, making for an unexpectedly dramatic exchange.
In a discussion of the complicated math underpinning the city's financial projections, Rhodes noted that pensioners could eventually get all their pension cuts restored if the city's pension investments perform well over the next several years.
"Tell me why that isn't a 100% recovery," Rhodes asked Detroit bankruptcy lawyer Bruce Bennett.
"The math gets a little tricky here," Bennett responded.
The exchange underscores the importance of the unfair discrimination issue in Detroit's bankruptcy. Although all major creditors have struck settlements, bond insurers Syncora and Financial Guaranty Insurance Co. (FGIC) argued earlier in the case that pensioners were getting extraordinarily favorable treatment.
Civilian retirees are getting a 4.5% cut to their monthly checks, the elimination of cost-of-living-adjustment (COLA) increases and a claw back of excessive annuity payments. Police and fire pensioners are getting a reduction in COLA from 2.25% to 1%.
Retirees voted to accept the cuts, as well as a 90% reduction in their health care benefits.
Still, Judge Rhodes must approve the plan after an exhaustive trial that lasted nearly two months. During the proceeding, Rhodes heard testimony from dozens of witnesses and examined hundreds of exhibits documenting the city's plan to slash more than $7 billion in unsecured liabilities and reinvest $1.4 billion over 10 years in basic services.
Bennett said the largely amicable plan is "very remarkable" after a tumultuous negotiation period with retirees, insurers, bondholders and unions.
"We had litigation with everybody about something," Bennett said.
He said the plan of adjustment is feasible and concluded that raising taxes to pay off debts was not workable, in part because the city has reached its legally allowable property tax rate. The city's well-chronicled inability to collect on taxes due to it proves that Detroit is already in a downward spiral in terms of taxation levels, where raising taxes only encourages more people to flee the city or stay and not pay.
"It's frankly easy to decide taxes should not be increased. The harder question is, should taxes be reduced?" Bennett said.
Core to the city's bankruptcy restructuring plan is the grand bargain, which Bennett defended. The plan aims to shield the city-owned Detroit Institute of Arts from having to sell masterworks while also providing the equivalent of $816 million to reduce pension cuts to city workers and retirees.
Bennett said there were rumors and speculation that other potential methods of monetizing the DIA were available, but he said there was no other way than the grand bargain to generate this kind of money. He said a sale couldn't guarantee it, and would damage the museum's reputation. And any loans using the art as collateral would be too costly for the city to pay back.
He noted that Chapter 9 bankruptcy law does not require the city to sell assets to pay off debts. Nonetheless, the city struck deals with Syncora and FGIC to hand off some riverfront property for redevelopment to reach settlements. It also signed a 30-year lease with the state of Michigan, which will run Belle Isle as a state park, wiping out about $4 million to $6 million per year off Detroit's annual budget.
Orr declined to speculate on the likelihood Rhodes would approve the plan. City lawyers said that if he does approve it, they would prefer Rhodes set a date for it to go into effect before Thanksgiving.
"I think we've met all the conditions we need to meet, but here again, he's the final voice in this matter," Orr said of Rhodes. "He's got a lot of work to do, a heavy decision. Frankly, the way he's run this process is commendable. This has been an unwieldy process, and he brought some order to it, he and the mediators."
Rhodes also raised questions about the amount of fees being paid to city lawyers and consultants and suggested they might be lowered through a mediation process. Orr said afterward that he understands the concerns, but he noted that the quick pace of the bankruptcy meant less costs for lawyers and experts, and must be measured against the amount of debt the city would wipe out in Chapter 9.
Some experts have predicted the city will end up paying more than $100 million in fees to lawyers, consultants and advisers.
"We've got an A-team working for us, and it's money well spent," he said.
Orr praised the mediators who helped create the bankruptcy grand bargain that led Gov. Rick Snyder and the Legislature to approve $195 million to help reduce pension cuts.
But Orr also gave credit to residents of Detroit, who he said have "soldiered through a fairly volatile beginning" of the bankruptcy process.
"Things seem to have settled down a little bit. They're starting to see some progress," Orr said. "We'd like to think we've turned a corner, but there's a lot of work to be done, and that's going to be taken up" by Mayor Mike Duggan's administration, the city council, Snyder's office and the oversight board that will hold sway over the city's budgets for another decade post-bankruptcy.
Orr's appointment as emergency manager is expected to end within days of Rhodes' decision.
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