New Blueprint
Emergency manager Kevin Orr has issued his plan of adjustment for Detroit to emerge from Chapter 9 bankruptcy. The proposal is politically complex and, if approved, precedent-setting.
It's complex, because to help cope with $18 billion of debt and liabilities, and severely-limited city services, it calls for, inter alia, the creation of a $815 million rescue fund over 20 years for Detroit - a city for decades run by Democratic mayors and administrations - $350 million of which would be contributed by the Republican-run state government. Another $365 million would come from local and national foundations, and $100 million from the Detroit Institute of Arts, all these players coming together in a sort of "grand bargain". The plan would be precedent-setting, because it proposes to slash not only unsecured debt but, as well, pensions and health-care obligations, which until now, given the state constitution and legal precedents, have been considered promises to pay that cannot be broken.
When Detroit first filed for bankruptcy protection last July, many thought that holders of unsecured bonds might ultimately receive 10 cents on the dollar at best. Under Orr's plan they will get somewhat more - 20 cents on the dollar, with secured creditors receiving a full 100 per cent of their principal. Pensioners fare a little better - the pension checks of general retirees would be cut by 34% and those of the police and fire retirees by 10%, but only by 26% and 4%, respectively, if the pensioners agree to support the proposed $815 million "grand bargain". This is likely to be contentious: the Police and Fire Retirement System board of trustees said last week, "We believe Detroit can afford much better treatment of its pension beneficiaries who dedicated years of their lives in the service of the city".
And there are other contentious issues. State legislators must approve the state's $350 million participation in the rescue fund, and some have already made clear their conditions for support. Senate Republican Majority Leader Randy Richardville wants assurances that other Michigan cities won't be next in line. Other legislators are insisting that their support is contingent on the establishment of a regional water authority, overseen by a regional board. Orr's plan proposes just that; Detroit would cede control of its decrepit water system to a suburban-dominated regional authority in exchange for $47 million each year for 40 years. Suburban leaders, however, and especially Oakland County Executive L. Brooks Patterson, are at best wary of any long-term deal - water or otherwise - with the City of Detroit.
So Orr's adjustment plan should be seen as no more than a well-crafted first-draft blueprint - much more than an opening discussion, but hardly a final framework - that faces formidable political opposition, and public-sector union resistance, before its presentation for confirmation by US bankruptcy judge Steven Rhodes in mid-April. Nonetheless, Washington, and state and municipal governments throughout the country - most of which are also struggling to determine how to meet what are likely unrealistic pension promises to retired workers - are watching the Detroit story closely.