A committee created by a U.S. bankruptcy court to represent Detroit's retired workers said on Friday it reached an agreement in principle with the city over pensions and healthcare, potentially giving the city a key ally.
The agreement, which was incorporated into a revised debt adjustment plan the city filed with the court late on Friday, added to a pile of deals Detroit reached with other major creditors this month.
It also increases the ranks of creditors that Detroit Emergency Manager Kevyn Orr has lined up so far to support his plan to adjust the city's $18 billion of debt and exit the biggest municipal bankruptcy in U.S. history that was filed in July 2013.
"The deal, which includes significant protections and potential enhancements for retirees under the city's plan, a cap on maximum pension losses to individual retirees and significantly greater funding for retiree healthcare benefits, reflects the significant efforts of the nine-member committee and its professionals," said a statement released by the retiree committee's law firm Dentons.
Sam Alberts, a Dentons attorney, said pension cuts agreed to by Detroit's two retirement systems could be significantly restored under certain circumstances.
According to the newly revised debt adjustment plan, a fund reserve account would be used to restore cuts if the pensions' funded ratio reaches a trigger level.
The revised plan also requires the systems to have special committees in place to guide investments over a 20-year period.
Last week, the board of Detroit's Police and Fire Retirement System accepted a deal that would result in no pension cuts for public safety workers but would reduce cost of living adjustments (COLAs) to 1 percent.
The General Retirement System board also accepted a deal for general city workers that calls for a 4.5 percent cut in pensions as well as the elimination of COLAs. The pension changes would be on a ballot sent to thousands of Detroit's workers and retirees, who will be asked to vote on the city's final debt adjustment plan.
But those deals and the one with the retiree committee depend on $816 million the city would tap to aid its retired workers. Michigan Governor Rick Snyder has asked the state legislature to approve $350 million of that amount, while the rest would come from philanthropic foundations and the Detroit Institute of Arts, which pledged the money to avoid a fire sale of art works due to the bankruptcy.
As for retiree healthcare, Alberts said that if Detroit succeeds in invalidating $1.45 billion of pension debt sold in 2005 and 2006, the money the city would have allocated to pay off that debt would instead be tapped for retiree medical coverage.
Earlier this month, Judge Steven Rhodes, who is overseeing Detroit's bankruptcy case, approved a crucial settlement between the city and two investment banks over costly interest-rate swaps. Also, the city reached a deal with three bond insurance companies over the treatment of voter-approved general obligation bonds.
Before the deal with the retiree committee was announced on Friday, Orr said in a speech to the American Bankruptcy Institute in Washington D.C. that there is still a lot of work ahead.
"Because despite some of the successes we've had with mediations and some of the settlements we've announced we've got to negotiate definitive documents," he said. "We've got to get through a plan structure where some of our counterparties haven't agreed to anything. ... That's going to be difficult."
Hold outs include bond insurance company Syncora Guarantee, which has been fighting the city over the swaps settlement.
The city's revised plan did not disclose any resolution for Detroit's water and sewer department.
Rhodes last week ordered the city and its three nearby counties into mediation over the creation of a regional authority.
Orr's proposal to lease the city's water and sewer departments to a regional authority for a hefty annual fee and using that money for unrelated purposes had drawn objections by officials in Macomb and Oakland counties, stalling previous talks.
(Reporting By Karen Pierog, additional reporting by Tom Hals and Lisa Lambert in Washington; Editing by David Gregorio & Kim Coghill)