Plan of Adjustment proposes $650 Million in “Financial Recovery Bonds,” most for UBS AG and Bank of America
POA slashes retirees’ annuity savings by alleged $273 million, in addition to pension and health care cuts; state pension “trusts” can increase cuts later
Detroit lost $732.2 million in state revenue sharing 2003-14
Retirees campaign to VOTE NO on POA, protests set for Wed. April 30 against PA 436, and Thurs. May 1 to “SHUT DOWN DETROIT”
By Diane Bukowski
April 21, 2014
DETROIT—Detroit Emergency Manager Kevyn Orr wants to finance his Bankruptcy Plan of Adjustment (POA), filed April 16, by borrowing $650 million in “Financial Recovery Bonds,” to satisfy “certain claims of unsecured creditors” at interest rates of 4 to 5 percent over 30 years.
At the same time, he proposes to exact brutal cuts from Detroit residents and taxpayers, workers, and retirees, including slashing annuity savings funds by a total of $273 million. The City of Detroit has already lost a total of $732.2 million in state revenue-sharing funds, from 2003-14, according to a recent Michigan Municipal League report.
“It’s the funky filthy rich hedge funds who are behind this, who want to put us in poverty,” retiree Cecily McClellan said at during a meeting of the Detroit Concerned Citizens and Retirees at N’namdi’s in Highland Park April 16.
She and other retirees, members of the Detroit Concerned Citizens and Retirees, are leading a VOTE NO campaign on the Plan of Adjustment. McClellan is also Vice-President of the city union the Association of Professional and Technical Employees (APTE).
UBS AG and Bank of America, who face dozens of major lawsuits and criminal charges for fraudulent practices across the globe, would get about $580 million of the recovery bonds under a proposed 40 percent “COPS Settlement” included in the POA.
That is 40 percent of $1.45 billion, the outstanding principal on the predatory $1.5 Billion “Certificates of Obligation” (COPS) loan the banks foisted on the city in 2005-06. According to a Citizens Research Council of Michigan report, the total amount outstanding in 2010, including interest, hedge fund profits, and other payments, was $2.9 billion. The COPS settlement does not say whether the city would be liable for the remainder.
Orr previously called the entire COPS transaction “void ab initio, illegal and unenforceable” in a Jan. 31 lawsuit, because it violated the city’s state-imposed debt limit, and used phony “Service Corporations” to sponsor the debt. He asked U.S. Bankruptcy Judge Steven Rhodes to cancel any remainder owed.
“This Court stated earlier and states again that it will not participate in or permit the city to perpetuate the very kinds of hasty and imprudent financial decision making that led to the disastrous swaps and COPS transactions,” Rhodes said Jan. 16, in denying Orr’s second proposed swaps deal with the two banks. “They have already caused great harm to city creditors and citizens.”Orr has said priorities in Detroit’s bankruptcy include public safety, streetlights, and blight removal, but paying the city’s debt clearly remains its chief goal.
But U.S. Bankruptcy Judge Steven W. Rhodes on April 11 approved a related $85 million interest-rate “swaps” settlement with the UBS and Bank of America, which actually totals $385 million with monies already paid out by the city. The main COPS settlement does not provide for the return of hundreds of millions the city has already paid under the 2005-06 deals, which have caused it to default on its debt three times since then.
Rhodes’ April 11 decision opened the floodgates for the current Plan of Adjustment. In its wake, some Unlimited Tax General Obligation (UTGO) bondholders happily agreed to settle for 76 percent of their original debt, or $272 million, instead of the 15 percent Orr originally proposed.
The plan as it now stands converts the city’s two Retirement Systems into “irrevocable trusts,” none of whose voting Trustees “may be an employee, contractor, agent or affiliate of the City or any labor union representing employees of the City, a member of any such labor union, or a Member or Beneficiary of the Retirement System,” according to the POA.
“Retirees are only looking at what they’re reading in the newspapers, about their pension cuts being reduced to 4.5 percent,” retiree Hassan Aleem said at the N’namdi’s meeting.
“They’ve got to understand, their systems will be in a trust totally controlled by the state. The Governor will appoint the trustees. How many people trust Rick Snyder with your pensions? They’re saying, ‘We’ve got your money and we’re not going to give you a damn thing.’ But this is our money and the retirement systems have a right to give it back to us.”
Aleem estimated that the POA as it stands now actually involves 50 to 60 percent cuts, not 4.5 percent. Currently, retirement system trustees are elected by their membership. The so-called “expert” trustees appointed in their stead will have complete control over the trusts’ funds, investments, employment of advisors and actuaries, as well as pay-outs to retirees, leaving proposed POA cuts to retirees essentially open-ended.
“The disclosure statement says anything they agree to now they have the right to revoke later, and not even notify you, even if they take us to the poverty level,” said retiree Carl Williams during the meeting.
The Plan, while reducing DGRS retirees’ pensions by 4.5 percent instead of the originally proposed 26-34 percent, mounts a severe attack on their Annuity Savings Funds. Most city workers have contributed 3 percent, 5 percent, or 7 percent of their own wages on a voluntary basis throughout their employment to this plan.
They plan to recover from each GRS member’s monthly pension check the alleged amount of interest “overpayment” from 2003 to 2013, for a total of $273 million, according to Jones Day attorney Bruce Bennett.
Even members who rolled their annuities over into private plans upon retirement will be affected, with the cut coming out of the pension portion of their check. The amount would be individually calculated for each retiree. The POA suggests that if retirees vote no on the plan, or persist in opposing the Emergency Manager Act or the city’s bankruptcy eligibility, their pensions will be cut 29 percent.The chart below, from the CRC 2010 report, shows that rates of return for the city’s retirement systems from 2005 to 2010 actually far exceeded the S&P 500 index, except for the disastrous years of 2008-09, during the global economic meltdown caused chiefly by Wall Street’s predatory lending practices.
Investment Returns; Total Fund Composite Return
S&P 500 Market Returns, DPFRS and DGRS (Citizens Research Council)
So, retirees at the meeting asked, does Orr also plan to increase the annuity portion of retirees’ monthly checks to compensate them for the systems’ prosperous years, during which they got only a 7.9 percent return instead of returns as high as 17.4 percent?
In a Reuters blog from Aug. 2013, Cate Long says “Orr has said many times that Detroit’s two pension funds have overstated their funding levels and used inappropriate assumptions in their valuations. But guess what? The state of Michigan uses almost identical assumptions as Detroit. Michigan’s Employee Retirement System is funded at a 10 percent lower level than Detroit’s General Retirement System (the lesser funded of the two systems).
Tina Bassett, spokesperson for the Detroit General Retirement System (DGRS), denied published reports that the DGRS has agreed to the POA.
“We have only agreed to the 4.5 percent reduction in monthly checks,” she told VOD. “None of the rest is acceptable, except the 20 percent cap on any Annuity Savings Fund reductions. How that will proceed is still being worked out. There has been no deal yet. We are still in negotiations. When there is one we will hold informational meetings with the membership. We are trying to get the best deal possible. It will still be up to the retirees to vote it up or down.”
She said the deadline for mailing ballots to retirees has been moved from May 1 to May 12. Each individual ballot would contain the cuts individual retirees will face, which will differ according to Annuity Savings Fund calculations.She said no matter how retirees vote, however, Judge Rhodes still has the final say-so, with a cram-down provision included in Chapter 9 open to him.
Funds from the Detroit Institute of Arts funders and the state of Michigan proposed in the plan, a total of $850 million, allegedly to aid retirees, are contingent on the acceptance of the plan by all retirees and all groups representing them, including the retirement systems, the unions, the Official Committee of Retirees and others.
Approval of the plan by voting “Yes” on ballots to be mailed out means agreeing that Article 9, Section 24 of Michigan’s Constitution does NOT protect public pensions from being “diminished or impaired,” which that section DOES say.
It also includes an agreement to withdraw all legal challenges to the POA, Detroit bankruptcy eligibility, and the Emergency Manager Act, PA 436. Bassett said the DGRS is still pursuing its Sixth Circuit challenge if and until a palatable settlement is reached and approved.
However, neither the DIA funders nor the State Legislature have yet given their approval to the funds, saying it is contingent on retirees’ approval first.Seven entities representing city workers and retirees currently have bankruptcy eligibility appeals pending at the U.S. Sixth Circuit Court of Appeals.
A class action lawsuit challenging the constitutionality of PA 436, which has redacted references to the City of Detroit to get Rhodes to remove his stay on lawsuits against state officials, is pending before U.S. District Court Judge George Caram Steeh. A hearing on the state’s motion to dismiss that lawsuit is set for Wed. April 30 at 10:30 A.M. at the federal courthouse at 231 W. Lafayette.Opponents of PA 436 plan to demonstrate outside at 9 a.m. The following day, Thurs. May 1, a broad coalition is sponsoring a “Shut Down Detroit” day of protest.
In his statement approving the swaps pay-out, Judge Rhodes clearly denigrated the hundreds of retirees and their supporters who have repeatedly demonstrated against pension cuts and the dismantling of Detroit since the bankruptcy filing.
“It is apparent each of parties is waging an orchestrated PR campaign,” Rhodes said. “This case is not about who wins in court of public opinion . . . It’s about enhancing both city’s future and creditor recoveries by using the most efficient and effective avenues available. In this case, that avenue is certainly not a PR campaign nor is it a litigation campaign for years at great expense. That [right] avenue is a campaign of all-out good faith mediation and negotiation as demonstrated by parties to the swap settlement.”
He said U.S. District Chief Judge Gerald Rosen, who is a member of the right-wing Federalist Society, has a “fervid commitment” to resolution of the case through mediation. Mediation is still ongoing on various matters, including the proposed dissolution of the Detroit Water and Sewerage Department, the city’s most valuable asset, through regionalization or privatization.
Chapter 9 differs from Chapters 11 and 13 in the Bankruptcy Code because it does not allow creditors to call for liquidation of a municipality’s assets. However, it contains a caveat.
“Section 904 [of Chapter 9] limits the power of the bankruptcy court to “interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor’s use or enjoyment of any income-producing property” unless the debtor consents or the plan so provides.” (Click on Municipality Bankruptcy Chapter 9for full U.S. Courts document.)
Rhodes ruled early on that EM Orr IS the debtor, the City of Detroit. Detroit is the only city across the country in Chapter 9 bankruptcy that is in control of an Emergency Manager (read dictator); others still have ELECTED OFFICIALS who so far have held off on public employee pension cuts, particularly in California.
(VOD—more to come on Plan of Adjustment analysis in separate stories.)
Read Complete Second Amended Plan of Adjustment and Disclosure Statement by clicking on: