(April 1, 2014) – The bankrupt City of Detroit has put forward an updated plan for settling with creditors, preserving key assets, and returning to solvency.
The plan stipulates aggressive liability cuts to the city’s two major public retirement systems, despite an $816 million infusion of outside funding. Retiree medical and death benefits are treated as any other outstanding debt, while pensions are afforded higher priority.
Members may vote on whether or not to accept the city’s plan once it has been finalized in coming weeks, according to municipal documents.
Retirees belonging to the police and fire system who accept the proposal would have their pensions cut by 6%, while those rejecting the plan face 14% benefit reductions. For members of the General Retirement System, a "yes" vote accepts lowering payouts by 26%; a "no" leads to a 34% benefit haircut.
Regardless of vote or pension system, the plan drops cost of living adjustments from benefit calculations.
In total, the proposal allocates $1.59 billion for police and fire pension claims and $2.3 billion for the General Retirement System. Until 2023, both systems’ assumed rate of return on investment would be capped at 6.25%.
These reforms reflect deeper benefit cuts than those laid out in the previous scheme, which was released in late February.
The updated restructuring plan protects the collection of the Detroit Institute of Art, which was potentially up for liquidation during earlier negotiations. In January, a group of non-profits including the Detroit-based Kresge Foundation and the Ford Foundation committed $330 million to help save the art works.
Under this latest plan, to preserve the collection the state of Michigan will nearly match the foundations’ contribution—since increased to $336 million. The museum itself has also committed $100 million to the effort. If the proposed deal goes through, the foundations, state, and museum will purchase all of the institute’s assets, which will then be placed “in a perpetual charitable trust for the benefit of the people of the city and state.”
The city’s 235-page plan addresses other potential sources of revenue, including new bond issuances, and outstanding debts.
Another point of progress revealed in the documents relates to the $288 million owed to UBS and Merrill Lynch for pension interest rate swaps. The financial firms have agreed to settle with the city for $85 million, and in turn would relinquish their claim on Detroit’s casino tax revenue.
"The city continues to make progress with its creditors and retirees and hopes to reach agreement in the near term on a number of outstanding issues," said Kevyn Orr, Detroit’s emergency manager, at the plan’s release.
"We believe that the plan we have proposed, and continue to refine, is feasible and allows the city to reduce its staggering $18 billion in debt and live within its means,” Orr continued, noting that the proposal “puts the focus back on providing essential public services to the city's nearly 700,000 residents."
Related Content: Kresge, Knight, and Ford Foundations Lead Effort to Save Detroit’s Art; Michigan Governor Offers Detroit Pensions a Helping Hand