(Recasts with vote by general retirement system board, adds
comments from law professor)
April 16 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
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,"
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)