At Crain's Detroit Event Honoring Bankruptcy Principals, Opposition Persists

DETROIT — On Wednesday at the MotorCity Casino Hotel, Kevyn Orr and Stephen Rhodes, central figures in Detroit’s recent Chapter 9 bankruptcy proceedings, were honored as Crain’s Newsmakers of 2014. As Orr, the city’s former Emergency Manager and Rhodes, bankruptcy judge for U.S. District Court for the Eastern District of Michigan, were feted at a lavish luncheon, on the street outside picketers loudly protested a settlement that substantially reduced previously agreed-upon pension benefits for the city’s retired workers.

Inside the casino’s enormous banquet hall the mood was giddy bordering upon euphoric. At a number of points during a conversation between Mr. Orr, Justice Rhodes, U.S District Judge Gerald Rosen, the chief negotiator between Detroit and its creditors, and Mary Kramer, Publisher of Crain’s Detroit Business, the event’s approximately 600 attendees loudly applauded the architects of the largest municipal bankruptcy case in American history.

Discussing the high points of the legal proceedings, including the so-called “Grand Bargain”—where private and public funders assembled $800 million dollars to preserve the Detroit Institute of Art’s collection—Orr, Rhodes and Rosen provided details of a complex legal process that will be analyzed and debated for years to come.

“Much more important than the legal decisions in the case will be the procedures that we used and the mediation process,” Judge Rhodes said. “I think that any municipality, whether they are in the zone of insolvency or insolvent or in bankruptcy, who’s looking for a way to resolve with their creditors, has the model [of Detroit’s bankruptcy].”

Tabbed by Michigan Governor Rick Snyder in March of 2013 as Detroit’s emergency manager with almost dictatorial control over the city’s finances, Orr expressed relief regarding an 18-month effort to pull the city back from the edge of ruin. At one point comparing his post-bankruptcy freedom to being on parole from prison, Orr also mentioned the difficulty of the settlement’s impact on the pensions of city workers.

“I got a lot of mail and emails from pensioners,” Orr said, “and a lot of stories that could have been my mother or my aunt.” He stated the necessity of “putting aside personal feelings” and “being a professional, doing your job” as a way to resolve doubts about a deal which has resulted in thousands of retirees having their benefits reduced by 4.5% and losing annual cost-of-living payments.

In July, 2014, Detroit retirees voted by more than a two-to-one margin to allow pension cuts, a critical component of the Grand Bargain that allowed the DIA to be spun off as an independent institution. The Detroit Free Press described this support by the petitioners most affected by reorganization as a “critical endorsement of the city’s restructuring blueprint.”

Judge Rhodes explained his view of the Grand Bargain, the settlement’s most contentious and fascinating component. The federal judge—who retired at the conclusion of the Detroit case—was emphatic that the DIA’s collection of European and American masterpieces was never truly at risk.

“The creditors position to monetize the art had no legal basis. It was never clear to me why the creditors would be able to do better in bankruptcy than outside of bankruptcy,” Rhodes explained, then added: “The city really needed the art to serve as the foundation of its revitalization.”

Outside the casino the mood was anything but festive.

“We are opposed to this grand theft that they call a Grand Bargain,” Cecily McClellan, Vice President of the Detroit Active and Retired Employees Association (DAREA) said. “They shed seven billion in debt and five billion of it came from retirees. All this media about art and Syncora and the city’s debt, it was all about robbing the health care, which is the lion’s share of this scheme.”

There are other indications besides angry pensioners that suggest the bankruptcy terms may not be as favorable for Detroit and its citizens as many hope.

Despite the settlement, funding shortfalls in Detroit’s pension are not fully resolved. The deal greatly reduced the city’s obligations, deferring major contributions for a decade. By some measures, the expected rate of return needed to adequately fund the pensions of 32,000 current and future retirees is overly optimistic—the problem that led the city into default in the first place.

The bankruptcy agreement also stipulates oversight by the Financial Review Commission, a watchdog group appointed by Governor Snyder, to approve or reject city spending, contracts, and budgets over the next 13 years.

On Wednesday The New York Times cited the Detroit bankruptcy as the first in a series of landmark decisions where public service employees experienced reduction in agreed-upon pension benefits—rights collectively bargained for and considered iron-clad under state law—due to poor fiscal planning or poor rates of return on pension fund investments.

The reorganization does provide Detroit with a workable fiscal plan, and Orr and Rhodes were effusive about the city’s post-bankruptcy future.

“The greatest accomplishment of course was to participate in a process that can return to the city and its residents an ability for the city to fulfill its mission to give hope and opportunity to its people,” Judge Rhodes said.

“The story is uplifting, it’s very positive,” Orr added. “People see it as a model for what could occur as opposed to a Dickensonian cautionary tale.”

Ms. McClellan and other DAREA members were emphatic about the flaws in Orr’s optimistic narrative.

“They’re trying to recoup money from our annuity,” McClellan said. “Our annuity savings fund was 100% contributed by the workers. There’s not a dime contributed by the city. And they’re trying to clawback almost $300 million from our annuity savings fund. It’s going to start March 1st and some people are not going to have a pension check as a result of them clawing back funds.”

“I’m losing $70,000 in a clawback and $130,000 over a 21-and-a-half year period,” said Seth Cook, a 2008 retiree from the city’s waste water treatment plant. “How do you work for somebody for thirty years and end up owing them money?”

As the grand ballroom cleared out, Mr. Orr and Judge Rhodes—now free to enjoy their hard-earned leisure—chatted amiably with well-wishers. Less then a 100 feet away on Brooklyn Street embittered pensioners dispersed, forced to make the most of a reduced financial outlook that they never bargained for.

PHOTO CAPTION: Judge Steven Rhodes and Former Detroit Emergency Manager Kevin Orr Wednesday at Crain’s Detroit 2014 Newsmakers of the Year luncheon.
PHOTO CREDIT: Aaron Eckels/Eighteen Photography