Detroit files plan to fix debt, leave bankruptcy

Detroit officials Friday laid out a plan for exiting the largest municipal bankruptcy in U.S. history that calls for slashing pensions for non-uniformed retirees by nearly one-third and repaying bondholders just $1 of every $5 owed to them by the city.

The proposed plan of adjustment, filed in federal bankruptcy court in Detroit, puts dollar figures on the potential cuts facing parties owed money by Detroit for the first time since the city filed its $18 billion bankruptcy case in July.

The plan would also cut pensions for police and firefighters, many of whom do not receive Social Security benefits, by 10 percent. City union leaders and retirees reacted to the plan with alarm, saying it would inflict undue pain on current and former city workers who are not responsible for the city’s dire fiscal problems.

“The proposed plan of adjustment is a gut punch to Detroit city workers and retirees,” AFSCME Council 25 President Al Garrett, who represents Detroit municipal workers, said in a statement. “The plan essentially eliminates health care benefits for retirees and drastically cuts earned pension benefits. Retirees cannot survive these huge cuts to the pensions they earned. The plan is unfair and unacceptable.”

Gwendolyn Beasley, 67, a former library clerk who retired in 2000 after a 34-year career, called the proposal unfair. Under the plan she would lose more than $400 of her $1,400-a-month pension.

“I’m outraged,” Beasley said. “We didn’t cause this deficit in the budget and to expect us to take these cuts is not right. I hope it is reversed in the courts.”

The proposed road map out of bankruptcy still faces weeks and months of negotiations in federal bankruptcy court. The talks could result in changes to the plan; under Chapter 9 of the bankruptcy code, Judge Steven Rhodes must get at least some of the creditors to agree to the terms he imposes.

Whatever results from those negotiations could have profound implications for worker pensions in other distressed cities.

Although public worker pensions are protected from cuts under the Michigan constitution, a December court ruling said that bankruptcy trumps those protections, leaving pensions vulnerable to be cut just like any other financial obligation. If that stands through appeals, public workers elsewhere could face a similar fate.

As part of the plan of adjustment, the city is proposing to spend $1.5 billion over 10 years on capital improvements, blight removal and equipment and technology upgrades. Those changes are sorely needed in Detroit, where police response times are close to one hour and 40 percent of the street lights do not work.

Officials said the investments in Detroit’s fractured infrastructure and broken services would result in an improved city that would have a chance to reverse the downward spiral that has seen more than a quarter of the population flee since 2000.

“We maintain that the Plan provides the best path forward for all parties to resolve their respective issues and for Detroit to become once again a city in which people want to invest, live and work,” Kevyn D. Orr, the D.C. bankruptcy attorney who was appointed the city’s emergency manager last March, said in a statement.

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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