The board of Detroit's General Retirement System on Wednesday approved economic terms of a settlement with the city that include cuts to pension benefits, putting in place another key component of Detroit's effort to exit bankruptcy by October.
The city also has a tentative pact with its other pension fund, the Detroit Police and Fire Retirement System, whose board is expected to vote later this week. Together, the two pension funds represent some 23,000 active members and retirees.
The tentative settlement with the General Retirement System, reached during a mediation session late on Tuesday, would cut pensions for general city workers and retirees by 4.5 percent and eliminate cost-of-living adjustments, the retirement system said in a statement.
"It is our responsibility to bring to our members and retirees the best possible deal with the best possible outcome for their consideration," Tina Bassett, the system's spokeswoman, said in the statement.
"The motion we passed today represents progress that allows us to move forward to continue to negotiate other details toward a final settlement agreement," she added.
Details of the proposed settlement with the police and fire pension fund were not immediately available, but the settlement is expected to mirror the deal reached for the Retired Detroit Police and Fire Fighters Association.
Detroit's municipal bankruptcy case, the biggest ever in the United States, has moved with lightning speed in the last week as Kevyn Orr, the city's emergency manager, has reeled in settlements with major creditors in the hope of wrapping up the case this fall.
Last week Detroit won bankruptcy court approval for a crucial deal over interest rate swaps, originally intended to hedge interest rate risk on pension debt, and reached a settlement with bond insurance companies over the treatment of voter-approved general obligation bonds.
On Tuesday, federal court mediators announced that Detroit had reached its first settlement with a group representing retired city workers.
Under the deal with the Retired Detroit Police and Fire Fighters Association, pensions for retired police and fire department workers would not be decreased but cost-of-living increases would be cut in half. A separate voluntary employee beneficiary association plan, or VEBA, will be established for retiree healthcare, according to a court statement.
CAN DETROIT STAY SOLVENT?
The tentative deals represent much smaller decreases in benefits than Detroit had been seeking. In its latest plan to adjust $18 billion of debt and exit bankruptcy, Detroit had cited pension reductions of as much as 14 percent for police and fire and 34 percent for general employees.
Some bondholders would have been hit with an 85 percent loss on their investments, something that fell to 26 percent in the settlement on the voter-approved bonds.
Jim Spiotto, managing director of Chapman Strategic Advisors and an expert on municipal bankruptcy, questioned whether Detroit's givebacks would harm its effort to remain solvent after it emerges from bankruptcy.
"The hallmark of a successful Chapter 9 is getting a lot of settlements," he said. "Those were substantial claims. They just need to be sure if this recovery plan is sustainable and affordable."
Laura Bartell, a law professor at Wayne State University in Detroit, said the pension funds got a "very good deal" for their constituents. They did so by dropping litigation against Detroit's bankruptcy eligibility, which Bartell said was not likely to succeed.
The city is expected to release a revised bankruptcy blueprint ahead of a Thursday court hearing on unresolved creditor objections. The lack of the revised document less than 24 hours before the hearing is to begin has raised eyebrows.
"I've never seen anything like this. You have a disclosure statement hearing and you don't have a disclosure statement," Bartell said.
Judge Steven Rhodes, of U.S. Bankruptcy Court, who is overseeing the case, on Tuesday denied an emergency motion filed by bond insurer Syncora Guarantee Inc to postpone the hearing until 14 days after the city files its amended statement.
The insurer, which had been battling Detroit over the swaps settlement, said holding the hearing before creditors have time to examine the revised document "is fundamentally unfair and does not respect due process."
Detroit's plan still faces a vote by its scores of creditors and a determination by Rhodes if it is fair and equitable and does not discriminate unfairly among unsecured creditors, which include other bond insurers and bondholders that could face much steeper cuts of as much as 85 percent.
Spiotto said Detroit will have to convince the judge that the inequity was justified due to costly litigation over pensions that could have resulted as well as protection for public worker retirement benefits in the Michigan Constitution.
(Reporting By Karen Pierog; additional reporting by Lisa Lambert in Washington; Editing by Tom Brown and Leslie Adler)