Economy

Everything You Need To Know About Detroit’s Bankruptcy Settlement

CREDIT: AP

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

A judge gave final approval to Detroit’s plan for emerging from bankruptcy on Friday, closing the courtroom chapter of the insolvent city’s recovery after 16 months of formal bankruptcy proceedings.

For city retirees and workers, the final deal is far better than what observers anticipated last fall and a significant improvement over what the city’s lawyers initially offered. Large financial companies with significant claims on the destitute city are walking away with less to show for their investments than they had hoped. In that sense, then, working people got a better deal from the city than faceless financial firms. But detaching the outcomes from those initial expectations produces a starker picture: big companies that made some shifty deals with corrupt former civic leaders are walking away with cash and property holdings in the city, and thousands of people who worked their whole lives on behalf of Detroit are having their retirement income trimmed to address financial problems they did not cause.

Friday’s ruling brings that dealmaking to a close and marks the beginning of the next stage of Detroit’s redevelopment. The deal allows the city to begin restoring public services that have lapsed almost entirely in recent years, tearing down blighted properties, and retrofitting itself for an economic future that may not look at all like the Motor City’s past.

As Detroit sets about refurbishing itself and attempting to lure back people and jobs, here are some key numbers to know about the bankruptcy and what happens next.

When Detroit declared bankruptcy in July 2013, it said it had $18 billion in debts it could not pay. Those numbers included some strange, seemingly inflated projections of the cost of retiree pensions and health care. The outsized estimates of pension liabilities in those initial bankruptcy documents were a significant source of concern from worker advocates who feared that emergency manager Kevyn Orr would use the figures to push for sharp reductions in retiree benefits. The other largest portions of the debt were bond obligations tied to various city properties — mostly the water and sewer system, but also casino revenue.

Detroit’s bankruptcy case was expensive, but now it looks like it was worth the money. Detroit’s spending on attorneys and consultants to steer it through bankruptcy is expected to top $100 million, a large enough number to draw significant criticism in a city that wasn’t even able to keep its street lights on over the past 16 months. Under the deal approved Friday, Detroit exits bankruptcy with $7 billion less in debt than what it owed in the spring of 2013. That means that a $100 million investment in counsel returned $70 in debt reduction for every dollar the city spent. The plan approved Friday features nearly $2 billion in spending to restore services, including hiring 200 new police officers and 100 new firefighters in a city where response times have spiked to about an hour on average.

The whole thing hinges on an $816 million deal involving multiple stakeholders. Detroit officials have taken to calling it the “Grand Bargain.” The city is raising $816 million from a combination of state funds and charitable donations tied to the Detroit Institute of Art. The money is being used to significantly reduce the size of cuts to retiree benefits that were imposed in the bankruptcy deal. The “Grand Bargain” also moves the art museum’s collection — one of the biggest and grandest publicly-owned collections in the country — into a private trust that will keep the works in the city and on display. Alternative approaches to monetizing the museum’s assets would have moved the works to private collectors, depriving the city of a major attraction and cultural resource. In return for sparing the museum from privatization and retirees from steeper cuts, Michigan’s state government gets a say in overseeing the city’s financial future. A 9-member oversight board will be created, with 7 of the votes on the board being appointed by the governor. Along with a deal to address water department debts through a new regional water authority that involves neighboring counties, the Grand Bargain is the lynchpin of the broader plan Rhodes approved Friday. Without it, most of the other deals that went into resolving Detroit’s bankruptcy would have been impossible.

One of the most important of those other deals came when retirees agreed to pension and health care cuts. Three-quarters of retirees and workers who voted on the bankruptcy voted in favor of the pension and health care cuts. Over 12,000 “yes” votes were cast out of about 15,600 total ballots submitted. While that means half of the roughly 32,000 current and retired city workers who were eligible didn’t bother voting, it also means that the cuts have political legitimacy after being approved by those affected. Emergency personnel will not have their pension amounts cut, but their annual cost-of-living adjustments are reduced from 2.25 percent to 1 percent, meaning their pensions are likely to erode in value due to inflation in the coming years. Civil service retirees will receive no annual COLA whatsoever, and face a 4.5 percent cut to their base pensions to boot. The city’s opening offer would have cut emergency worker pensions by up to 10 percent and every else’s by up to 34 percent. The Grand Bargain funds were a key ingredient in shrinking the cuts retirees face. Both groups face significant increases in out-of-pocket expenses for health care as the city’s insurance system for retirees is being replaced with a voucher system for younger retirees and Medicare for those 65 and older. Workers like former firefighter Brendan Milewski and retired librarian Gwendolyn Beasley have told ThinkProgress that they may face choices between health care and other necessities like food and rent.

Convincing a new generation of people to invest their lives in Detroit in the way Milewski and Beasley did is the key challenge of the coming years. Detroit’s population has dwindled rapidly from over 1 million in the early 1990s to under 700,000 in the past two years. In 2013, it fell to 688,701 — barely a third of its peak population in 1950. After appearing in the list of the top 10 largest U.S. cities by population every decade since 1910, Detroit slipped to 18th in the 2010 Census. Stopping the exodus is key to the city’s future, as urban policy experts have told ThinkProgress in the past.

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