Is Detroit’s Bankruptcy Making Progress?

We’ve written about Detroit’s bankruptcy on our blog in the past.  Back in December of 2013, Judge Steven Rhodes catapulted the Motor City into national headlines when he announced he would allow Detroit to file for Chapter 9 bankruptcy.  The announcement of the biggest municipal bankruptcy in the nation’s history stunned the press and public alike, and left Detroiters with a mixed bag of emotions.  On one hand, the move inspired hope that a fresh start and a chance to heal would be attainable at last — but on the other, it also led to widespread anxiety regarding the thousands of pensions hanging precariously in the balance.  Since then, four tumultuous months have passed.  Is Detroit’s bankruptcy making progress?


Image by Bernt Rostad.

Detroit’s Bankruptcy: December, 2013

When we last left off in December of 2013, Detroit’s $18.5 billion bankruptcy was official — but far from settled.  Governor-appointed Emergency Manager Kevyn Orr was scrambling to assemble a feasible repayment plan with Detroit’s thousands of creditors, with Chief U.S. District Judge Gerald Rosen appointed to mediate intense negotiations between Orr, creditors, unions, and retirees.

Complicating matters further, concerned retirees and union members were also pairing with attorneys from the AFSCME (the American Federation of State, County, and Municipal Employees) to appeal Rhode’s ruling, citing the Michigan Constitution’s provisions for guaranteed pension security.

In other words, Detroit was concurrently engaged in not one, but two financial struggles: one against its creditors, and one against its own population.  With millions of dollars and thousands of futures dependent on the eventual outcome, the situation could be described as true-life, high-stakes cliffhanger.

What’s happened since?

EM Kevyn Orr. Image from Click On Detroit.

EM Kevyn Orr. Image from Click on Detroit.

“Who Knows? I’ve Been Wrong Before.”

Detroit is approximately $18.5 billion in debt.  To put that into context, America’s second-largest municipal bankruptcy — a Chapter 9 filed by Alabama’s Jefferson County in late 2011 — was recorded at “just” $4.2 billion.  That means that Detroit’s debt is the largest in U.S. history by a margin of over $14 billion.

Of that $18.5 billion, approximately $12 billion is unsecured debt owed to various insurers and bond buyers.  Another $3.5 billion is owed to pension plans.  Under the provisions of Kevyn Orr’s sprawling repayment plan, $85 million must be repaid to Bank of America and UBS.  The plan also makes a spending allotment geared toward fixing some of Detroit’s underlying problems, such as underfunded police departments, notoriously spotty lighting, and large-scale blight and vacancy.

No one disputes the glaring fact that Detroit is sorely in need of improved public services, crime prevention, and property maintenance.  What is in dispute is the matter of just where the money will come from.

Pensioners fear they will become Detroit’s financial scapegoats.  Under Orr’s current plan, municipal workers will roughly one third of their pensions, while retirees will be forced to relinquish about 10%.  According to Al Garrett, president of Michigan’s AFSCME, “Retirees cannot survive these drastic cuts.  A more than 30 percent cut combined with the virtual elimination of healthcare is devastating to people who have dedicated a career to Detroit.”

This glaring conflict between Detroit’s pensioners and Orr’s number-crunchers has led to a series of heated negotiations, which have largely been shrouded in speculation due to confidentiality requirements.

However, the protracted mediation talks may finally be drawing to a close.  The city missed its recent deadline to file a revised repayment plan, but resolution may be within reach nonetheless. The board of the Detroit Retired Police & Fire Fighters Association will meet to vote on the latest version of Orr’s proposed plan — though pension fund officials are somewhat dubious as to how much resolution a vote will really provide.  According to pension fund chairman George Orzech, “We’re all expecting to come to some kind of understanding tomorrow, I hope.  But,” he adds wearily, “who knows?  I’ve been wrong before.”

The public will simply have to wait for negotiations to develop, as Orr’s team isn’t disclosing any information.  According to spokesman Bill Nowling, “We can’t talk about any of the discussions that may be going on in mediation.”

Image from AFSCME Local 88

Image from AFSCME Local 88.

“They Are Treating Us Like Animals.”

The pending vote on the latest pension negotiations could swing one of two ways, leaving Detroit at yet another fork in its financial road.  If pensioners vote in favor of Orr’s latest plan — which calls for pension cuts tallying 26% for general retirees and 6% for retired police officers and firefighters — the bankruptcy could continue to move forward uncontested.  Of course, even allowing for this “best case scenario,” Orr’s plan is still subject to further votes by creditors, as well an additional review by Judge Rhodes to determine the plan’s ultimate accuracy and feasibility.

If pensioners disagree with the terms of the latest negotiation efforts, they plan to take the matter to appeals court.  According to Bruce Babiarz, Police and Fire Retirement System spokesman, “The Police and Fire Retirement System from Day 1 has been negotiating in good faith.  We are hopeful of reaching an agreement.  But if we can’t reach an agreement, we will exercise our rights for an appeal in the U.S. 6th Circuit Court of Appeals.”

Babiarz’s statement is a striking echo of George Orzech’s.  Both express somewhat half-hearted hopes for conflict resolution — but they also contain undercurrents of doubt that a mutually acceptable plan can be reached through talks alone.  If those doubts are confirmed, pensioners, retirees, and the AFSCME are ready to go to court.

While the powers that be issue computations and calculations from Detroit’s courtrooms and offices, the city’s residents — those who will actually bear the brunt of Orr’s budgetary revisions — can do little more than watch and wait.  Because the financial negotiations remain confidential (and in perpetual flux), Detroiters are essentially in the dark when it comes to their own futures.  All Detroit’s workers can state with confidence is that they risk incurring devastating losses if Orr’s plans push through without further modification.

Carl Anderson, a retired employee of the Detroit Water Department, channels the rage felt by many of the city’s residents.  “Where do you go after this?” he asks.  “You can’t afford healthcare.  You really can’t afford to live after they cut your pension.  They are treating us like animals.  It’s like in the 1800s and we are farm animals.  […]  They have no more use for you, so are you supposed to walk off and die?  That’s not going to happen.  We are going to stand up against this.”

If you would like to speak confidentially with an experienced bankruptcy attorney, call the law offices of Maselli Warren today at (800) 891-2657.