Retirees Lose Last Shield Against Pension Cuts As Judge Approves Detroit’s Payoff To Banks


Michigan Gov. Rick Snyder (R) and the man he appointed to manage Detroit's financial emergency, Kevyn Orr

After rejecting two previous proposals for being too generous to banks, on Friday a federal judge approved Detroit’s plan to resolve a small but critical portion of the bankrupt city’s multi-billion dollar debt.

The city will pay $85 million to two banks to resolve $272 million in debt, eliminating complex financial deals called “interest rate swaps” for about 31 cents on the dollar. Bankruptcy Judge Steven Rhodes had previously rejected Detroit’s attempts to pay $230 million and $165 million to end the swaps deals, saying those offers were too generous to UBS and Bank of America.

The swaps deals give the banks control of tax revenue from Detroit’s casinos, and ending the swaps will return that money to Orr’s control. That is good for the city, but Rhodes had previously found that the city was “reasonably likely” to win a lawsuit to cancel the swaps outright. Orr’s critics have also pointed out that the swaps deals were the primary cause of Detroit’s bankruptcy. So why would the city strike a deal to pay those same firms $85 million when it stands a good chance of winning a court case that would allow them to pay the banks nothing?

The answer involves intricacies of bankruptcy law. By striking a deal with UBS and Bank of America, Orr has won their support for the broader “plan of adjustment” that will dictate how the city handles its remaining billions of dollars in unpayable debts. The bankruptcy plan is a blueprint for which groups with claims to Detroit’s money will get paid and how much of what they are owed will ever actually reach them. Drafts of the plan include major cuts to retiree pensions and health care that are likely to leave many of the city’s 20,000-plus retirees in poverty. In order to force retirees to accept such cuts, Orr needs to win approval from other classes of creditors such as the banks.

Today’s ruling therefore means retirees are more likely to face major cuts to their pensions despite having played no role in bankrupting the city and despite having provided decades of service to Detroit and its people. Orr says he does not want to use the “cramdown” tactics that today’s ruling opens up for the city for fear of jeopardizing another key line of funding for the city’s plans.

But Orr hasn’t played fair with retirees at any stage of the ten-month bankruptcy process, as even Rhodes acknowledged in one major ruling last fall, which makes it hard for workers and retirees to trust his word.