Detroit readying blueprint for bankruptcy exit

AP News
Posted: Feb 18, 2014 5:30 PM

DETROIT (AP) — Detroit's creditors and residents this week are expected to get their first official glimpse of the road out of bankruptcy, although fights and tinkering over many of its most contentious elements likely will continue.

As early as Wednesday, state-appointed emergency manager Kevyn Orr could file to the bankruptcy court his proposal for restructuring the city's debt. The so-called plan of adjustment, due by March 1, is a blueprint of sorts for Detroit, which is undergoing the largest municipal bankruptcy in U.S. history.

"The numbers may change dramatically after this plan is filed," said Wayne State University law professor Laura Bartell. "... They'll keep amending it until they feel they've reached what they need."

Under the bankruptcy process, scores of lawyers representing all sides — city unions, retirees, two pension systems, banks, bondholders and other creditors — all come before a federal judge who has appointed another judge to mediate and hammer out deals that still can get tossed back for more fine-tuning.

The 99-page restructuring plan, a draft of which The Associated Press obtained last month, reflects that complexity. It calls for retirees and pensioners to receive $4.3 billion in payments and bondholders about $1.1 billion during the next 40 years. That would leave a surplus of nearly $336 million for the bankrupt city, which has an estimated debt of at least $18 billion.

Also included is millions of dollars promised by foundations, the state and the Detroit Institute of Arts to prevent any possible sale of city-owned pieces in the museum to bolster at-risk pensions.

The plan will be accompanied by a disclosure statement, which outlines the level of reinvestment, including municipal services, planned during the next 10 years.

The pensions are among the most contentious aspects of the restructuring plan. Judge Gerald Rosen, the chief mediator between the city and its creditors, took the unusual move of asking foundations and others to raise $500 million to protect the art while assisting the pensioners, who nonetheless are expected to lose some benefits.

"Like I tell the guys, 'Right now, we're lost. We'll just have to wait and see what happens,'" said Bob Wallington, 72, who retired from the Detroit Fire Department in 2000 after 30 years but keeps up in touch through a retirees' association and talks with former colleagues. "We don't really know. ... We get bits and pieces and proposals. We're just in limbo."

Wallington said he takes little comfort from the philanthropic and public pledges since bankruptcy Judge Steven Rhodes declared in December that pensions aren't immune to cuts, contrary to language in the Michigan Constitution. Michigan Attorney General Bill Schuette has urged a federal appeals court to consider the issue.

"You know and I know city is in big trouble. Some kind of financial adjustment has to be made, but don't make it so tough on us," Wallington said. "We don't have any negotiating powers anymore. It should be talked over. Don't just say, 'This is what we're going to do.'"

Despite the concerns, pensioners could end up getting more than other unsecured creditors if the outside support comes through — creating another point of contention, said James McTevia, a turnaround expert and managing member of McTevia & Associates in suburban Detroit.

"Other creditors are going to cry foul, but I can tell you, I don't think there's any law against that at all," McTevia said.

Bartell said the goal is to obtain "the maximum amount of affirmative votes from the creditors." Ideally, you get every creditor group to approve the plan, but if that fails the judge has to implement "a cram-down," or a plan that's not agreed upon by all parties, she said.

"A cram-down is not difficult in a Chapter 9, but I'm sure the judge would much prefer this be a consensual plan," she said.

Overall, McTevia believes the restructuring plan will be confirmed "because it's feasible." He said Detroit might be "the Titanic of insolvencies," but Rhodes' team is "negotiating through ice floes."

"Most of the controversial issues are behind us, quite frankly — the very fact that Detroit is in Chapter 9 is controversial ," he said. "I am looking for a relatively smooth exit."


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