A federal judge Friday approved Detroit’s plan to shed $7 billion in debt, calling it “an ideal model” for rebuilding a broken city while acknowledging the pain imposed by the biggest bankruptcy case in U.S. history.
U.S. Bankruptcy Judge Steven Rhodes approved a plan that includes cuts to retiree pensions and other obligations considered unthinkable before the city filed for bankruptcy last year. The plan also includes $1.7 billion in spending on new police cars, fire trucks and improved city services.
The approval pushes Detroit to the brink of exiting bankruptcy court in a decision that comes 15½ months after Gov. Rick Snyder approved a bankruptcy petition triggered by population loss, a dwindling tax base, corruption, mismanagement and financial problems.
The judge concluded Detroit’s plan was fair, feasible and in the best interests of creditors, particularly residents who endure an “inhumane and intolerable” level of city services.
Near the end of his 90-minute speech, Rhodes warned city leaders, including Mayor Mike Duggan and City Council President Brenda Jones, who sat in the front row of the courtroom, not to waste the opportunity.
“We give the city back with the fresh start and second chance the city needs,” Rhodes said.
“Now is the time to restore Democracy to the people of Detroit,” he added.
He also urged residents and others to use their anger over the bankruptcy and loss of local control during the city’s financial emergency.
“Your anger will be what prevents this from happening again.”
Rhodes acknowledged retirees and the suffering they will experience in the wake of Detroit’s bankruptcy case and pension cuts.
“This will cause real hardship and, in some cases, it is severe,” Rhodes said. “This bankruptcy, however, like most, is about shared sacrifice that is necessary because the city is insolvent and desperately needs to fix its future.”
The decision was closely watched by retirees, Wall Street banks and officials in struggling communities nationwide.
He called Detroit’s bankruptcy plan “an ideal model for future debt restructurings.”
The judge justified approving the plan by pointing out the city’s inability to provide basic city services.
“Detroit’s inability to provide adequate municipal service runs deep and has for years,” Rhodes said. “It’s inhumane and intolerable and it must be fixed. This plan can fix these problems.”
A pillar of Detroit’s debt-cutting plan is the so-called “grand bargain,” which will shield the Detroit Institute of Arts collection from creditors and soften pension cuts. The grand bargain required state legislation and includes $195 million from the state and $466 million from foundations, corporations and private donors.
Rhodes said the grand bargain “borders on the miraculous.”
The grand bargain will pump the equivalent of $816 million into the city’s pension funds over the next 20 years through contributions made by private foundations, state taxpayers and private donors to the Detroit Institute of Arts.
“No one could have foreseen this settlement when the city filed its case,” Rhodes said.
Under the plan, the city will cut pensions for general retirees 4.5 percent and eliminate annual cost-of-living increases. Police and firefighter pensioners will see their 2.25 percent annual cost-of-living-adjustment reduced to about 1 percent.
Detroit also will recoup up to $239 million from retirees whose optional annuity savings accounts were credited with interest earnings that exceeded the retirement system’s actual investment returns. Some members of Detroit’s General Retirement System face additional reductions in their monthly pension checks of up to 15.5 percent through the annuity savings fund recoupment, or clawback.
Rhodes went line-by-line through objections and legal issues central to the “grand bargain,” which places city-owned art in a trust and shields the State of Michigan from being sued to pay pensions.
The judge said litigation surrounding whether the art could be sold or if the state could be on the hook for paying $3 billion in pension claims would “long, complex and expensive.”
“The court approves all aspects of the grand bargain,” Rhodes said.
Rhodes also rejected arguments made by a small group of dissenting creditors that the city should sell pieces of its art collection or borrow against the value of the masterpieces housed in the Woodward Avenue museum to satisfy debts.
“To sell the DIA art would be to forfeit Detroit’s future,” Rhodes said. “The city made the right decision.”
He was particularly impressed by testimony that the museum’s art was held in a public trust and the donor restrictions prevented an art sale.
Rhodes also approved a slew of deals negotiated on the sidelines of the bankruptcy case with creditors including bondholders and bond insurers.
The city will remain under several layers of oversight to ensure Detroit does not slide back into insolvency. That oversight includes a nine-member financial review commission that includes two people from Detroit.
That is a mistake, Rhodes said, and he urged Snyder to eliminate the two city positions, calling city input a potential conflict that could undermine the process.