Just hours after U.S. Bankruptcy Court mediators announced an historic agreement between the city and pensioners from the police and fire departments, news reports emerged about a second deal for general retirees.
Both agreements are potential bombshells in this already landmark case, in part, because they are significantly better for retirees than anything Emergency Manager Kevyn Orr has publicly discussed or included in court filings. General services pensioners, according to the most recent city court filings, would have been facing a 34 percent cut if they didn’t approve the city’s eventual bankruptcy exit plan and 26 percent if they did.
But according to last evening’s news reports, the deal now includes (just) a 4.5 percent reduction in the monthly pension payments, significantly lower than the previous proposals for the roughly 25,000 general service retirees. Meanwhile, retired police and firefighters aren’t facing any reductions of their current pension payments, according to a statement released early Tuesday afternoon.
Don’t think everyone will find this a perfect deal. Plenty of public statements from retirees and their supporters have called for zero cuts to pensions. Those folks won’t be happy about the two deals’ provisions under which both employee groups face the elimination of some contractual cost-of-living adjustment (COLA) increases. General employees lose it altogether, while police and fire have some reductions in the near future with the option of gaining the COLA payments back.
The two agreements require the roughly 32,000 retired, former or current employees involved to vote in favor of the city’s bankruptcy exit plan as a class. The so-called “grand bargain” money is also tied to a favorable vote. That’s the $866 million that comes from foundations ($366 million), the Detroit Institute of Arts ($100 million) and the state ($350 million). Those funds would be put toward pension funds in exchange, in part, for the museum’s collection remaining intact and not being sold to pay other city creditors.
But the state money so far hasn’t materialized in any form except for Gov. Snyder’s proposal for it. With these employee agreements in place, the pressure is on the Legislature now to find some funding to complete the terms the other parties have set forth.
This next chapter in Detroit’s bankruptcy has happened. The next (next) chapter will be the pension fund leadership lobbying members to vote in favor of the plan and how Orr, who has given the city’s current and former employees far more than he publicly offered, will treat banks and other financial institutions in the next round of court filings outlining the city’s exit plan.
-By WDET’s Sandra Svoboda
@WDETSandra and email@example.com
Here’s the statement released by mediators in the Detroit bankruptcy case about the deal reached between the city and the Retired Detroit Police and Fire Fighters Association:
[sc_embed_player fileurl="http://www.nextchapterdetroit.com/wp-content/uploads/2014/04/4.11..14-Judge-Rhodes-Ruling-on-Swaps-Agreement.mp3"] Here is the audio of Bankruptcy Judge Steven Rhodes issuing his ruling in favor of the city’s agreement with two global banks on the interest rate swaps debt in the city’s Chapter 9 case.
In an interview with Reuters news agency, Detroit’s Emergency Manager Kevyn Orr says the city’s bankruptcy process has convinced him not to ever run for public office. “This has erased any political aspirations, dead or barely alive, that I ever had, and I was a political science major,” Orr said. “This has done me in.”
Orr, a Florida native, attended University of Michigan for undergraduate work and then returned to Ann Arbor for law school. His legal career, focused in private bankruptcy work, included time at the Resolution Trust Corp., the federal agency that worked on the aftermath of the savings and loan crisis of the 1980s. Orr also was chief counsel during the Whitewater investigation that had links to former President Bill Clinton and former U.S. Senator and Secretary of State Hilary Clinton and he represented Chrysler Corp. during its financial troubles.
But Orr tells Reuters the Detroit Chapter 9 case will likely be his last municipal bankruptcy. His plans after he wraps up in Detroit? “A long vacation on a warm island” with his wife.
Attorneys for the city of Detroit filed a witness list this week in bankruptcy court. Among the 27 individuals named are Emergency Manager Kevyn Orr, Mayor Mike Duggan, Skillman Foundation President and CEO Tonya Allen, and Midtown Detroit Inc. President Susan Mosey.
From the Detroit Institute of Arts, the list includes Eugene Gargaro, chairman of the board, Graham Beal, director, president and CEO, and Annmarie Erickson, executive vice president and COO, and Board Member Marc Schwartz.
Other city officials named include John Hill, chief financial officer, Detroit Police Chief James Craig, and the fire commissioner. Several state employees are on the list including State Treasurer R. Kevin Clinton and Richard Posthumus, a senior advisor to Gov. Rick Snyder. The list also includes numerous financial, actuarial, accounting and restructuring consultants.
Minutes after the bankruptcy court mediators released a statement and proposed terms of the deal between the city and three bond insurers, Emergency Manager Kevyn Orr appeared on CNBC. Here’s the Storify version of what he said — with extra context and background:
The mediators in Detroit’s bankruptcy case released a statement this morning, describing terms of the deal reached between the city and three bond insurers. The agreement reduces the trio’s $388 million claim to $287.5 million and says the city “intends” to use the difference to support pensions, specifically those of the poorest Detroit retirees by ensuring they receive payments higher than the federal poverty level.
That’s a 74 percent payout, far above the 15 percent proposed in the city’s latest Disclosure Statement. But the agreement gives the city one creditor class that is guaranteed to vote in favor of the bankruptcy plan, allowing the court to mandate the rest of the plan and its terms for other creditors, including pensioners.
“The mediators are privileged to have played a role in assisting the parties to find common ground in reaching a resolution that reflects not only a fair settlement to the parties, but also creates an opportunity for the city to provide additional assistance to retirees,” the mediators’ statement reads. “…the Mediators hope that this settlement will encourage all of the remaining parties to the bankruptcy to re-double their mediation efforts to reach meaningful agreement which can be incorporated into a fair and balanced agreed-upon Plan of Adjustment to be presented to the Bankruptcy Court for confirmation.”
The bond insurers involved are National Public Finance Guarantee Corp., Assured Guaranty Municipal Corp. and Ambac Assurance Corp. In November, they took legal action against the city voter-approved property taxes were being illegally diverted to the general fund.
The deal will be reflected in the city’s next Disclosure Statement, due in bankruptcy court next week.
Detroit workers’ annuity savings are likely to be targeted during the ongoing bankruptcy process, with the city seeking to recoup up to $400 million from them, according to reports.
Detroit Free Press Personal Finance Columnist Susan Tompor writes: “It’s likely to be a worrisome part of the package for general city retirees and workers. But the issue is whether the savers in the plan wrongly benefited from overly generous interest payments at the expense of other retirees.”
City workers who paid into the annuity plan — only general city workers, not police and fire — were able to contribute to the plan with guaranteed rates of return, with the pension funds used to cover the difference between the promised 7.9 percent and the lower, actual return rate.
From another Free Press article:
Under the savings plan, city workers set aside of up to 7% of their pay into an annuity savings fund separate from their pension fund and were guaranteed a rate of return of 7.9%. In part to pay pensioners who had gone years without pension increases, the city’s General Retirement System distributed as bonuses earnings in excess of that 7.9%. For the active worker the bonuses went into the annuity fund; and for the retiree the bonuses was paid by way of a 13th check. The practice continued even in years when investment returns were less than the guaranteed minimum payout, forcing pension fund trustees to divert assets to pay the guaranteed minimum.
By recouping some of those returns, Emergency Manager Kevyn Orr could reduce overall cuts to pension payments as part of the bankruptcy settlement. The cuts are currently proposed at up to 34 percent for retirees in the city’s General Retirement System and up to 14 percent for police and firefighters. Those reductions drop to 26 and 6 percent respectively if retirees approve the city’s offer. About 32,000 current, former and retired city workers are part of the pension system.
In the annuity issue, the city would need to recalculate the value of each employee’s annuity based on the true return rates instead of the 7.9 percent and attempt a “payback” of some of the excess as part of the bankruptcy process.
For active or former city workers not yet collecting pension checks, the difference would be deducted from the value of their annuity account. For retirees collecting pensions, the city would reduce monthly pension checks using actuarial values over a retiree’s expected lifetime.