Detroit’s record bankruptcy is likely to hit investors much harder than pensioners

It appears these protesters may mostly have their way as Detroit's record $18 billion bankruptcy wends it way toward a resolution. (Photo by Bill Pugliano/Getty Images)

As Detroit slowly makes its way toward a possible emergence this fall from the nation’s largest-ever municipal bankruptcy, one group of stakeholders stands to make out better than many imagined early on: city retirees.

Make no mistake, the city’s 32,000 retirees stand to absorb significant cuts, but they are nothing like the reductions of 27 percent or more that were envisioned in the emergency manager’s restructuring plan released earlier this year.

Under the revised plan, approved overwhelmingly in a vote of current workers and retirees, former rank-and-file city employees would face 4.5 percent pension cuts, while losing cost-of-living increases. Retired firefighters and police officers would give up a portion of their annual cost-of-living increases.

The more modest reductions were made possible by an agreement by the state, private donors and foundations to provide $816 million for the city’s underfunded pension funds. The "grand bargain" brokered by Michigan Gov. Rick Snyder (R),  also puts the Detroit Institute of Arts’ world-class collection in a protected trust.

“The voting shows strong support for the City’s plan to adjust its debts and for the investment necessary to provide essential services and put Detroit on secure financial footing,” said emergency manager Kevin D. Orr.

More than 82 percent of those eligible for a police or fire pension who voted supported the plan, while 73 percent of the voters eligible to receive benefits from the other pension fund supported the plan, according to results released late Monday night.

The vote marks a major step in the effort to get the city to reorganize its $18 billion in debts and move it out of bankruptcy.

The big losers under the plan as it is shaping up are investors in bonds to fortify the pension funds, as well as bond insurers who backed those deals.  Those groups have generally opposed the direction of the bankruptcy workout.

The city also has faced protests from water customers, 15,000 of whom have had their service cut off for delinquent bills. That ignited protests, and the city has suspended cutoffs as it tries to better publicize its payment plans and other help for customers.

Federal bankruptcy Judge Steven W. Rhodes is scheduled tohold a trial on the bankruptcy plan beginning Aug. 14. The deal, which could allow the city to be out of bankruptcy by the time Orr’s term expires in the fall, also envisions about $1.5 billion in investment over the next decade to improve basic city services, from police and ambulance response times, to unreliable bus service that leads to hours-long commutes for some people in the sprawling Motor City.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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