Detroit’s Bankruptcy and Pension Solution Depends More on its Planned Recovery and Rebirth – Not Just Cutting Costs
It’s time to take the fear out of the future for Detroit, according to James Spiotto, Partner and Head of the Special Litigation, Bankruptcy and Workout Group at Chapman and Cutler, LLP. Preparing Detroit for brighter days ahead is contingent upon a reasonable Recovery Plan, and assuring City employees that there is more – not less – for them if pension payments are adjusted as part of the effort to fund the City’s recovery.
“Chapter 9 Bankruptcy is only a process and not a solution.”
“The people of Detroit are good people who deserve a path to recovery and assurance that they have nothing to fear and all to gain in consensually resolving the issues in an affordable and feasible Recovery Plan,” said Mr. Spiotto in his remarks at the recent Detroit Bankruptcy Forum.
Hosted by the Honorable John Conyers, Jr., Ranking Member of the House Committee on the Judiciary, the Forum addressed the legal and other implications of Detroit’s chapter 9 bankruptcy filing. Professor Michael Eric Dyson of Georgetown University moderated the roundtable, which consisted of 12 participants, including elected officials, attorneys, professors, and labor representatives.
“The people of Detroit are good people who deserve a path to recovery and assurance that they have nothing to fear and all to gain in consensually resolving the issues in an affordable and feasible Recovery Plan.”
Mr. Spiotto, also a co-publisher of MuniNet Guide, was among the participants at the session.
“The Forum was a good discussion of the issues and the need to stay focused on the Recovery Plan to reinvest in Detroit’s Infrastructure and essential services,” he said. His comments were based on his vast experience representing clients (states, municipalities and creditors) in connection with financially-challenged situations related to state and local government debt financings, and his knowledge of the scope and impact of Chapter 9 and municipal bankruptcy.
“The present course is a litigation meltdown which does not and cannot provide the benefits to workers and retirees that a Recovery Plan with full funding of essential services and affordable payments to workers and retirees can provide. If the City of Detroit’s Recovery Plan does not succeed and strive, then there will not be the revenues to pay workers and retirees.”
In his introductory comments, Representative Conyers provided an overview of the events leading to Detroit’s bankruptcy filing. Citing a recent Washington Post article, he said that, according to Emergency Financial Manager Kevyn Orr, Detroit owes approximately $18.5 billion, which includes about $3.5 billion in retiree pension obligations (which the City’s pension funds adamantly dispute) and $6 billion in health care and life insurance obligations.
“Pensions are important because they affect the people who are critical to the recovery but we cannot crowd out the funding of essential governmental services necessary for recovery.”
Several factors contributed to the decline of Detroit, he said, including a declining automobile industry that resulted in population decline and a shrunken tax base. In addition, the City has experienced significant blight and failing infrastructure.
Mr. Spiotto explained that the experience of Detroit marks a break from the past. “Prior to Detroit, any economically-challenged major city of a state worked with the state to achieve a solution to the economic problems and to develop a recovery plan to avoid the financial difficulties in the future.”
“Part of the resolution of the Detroit economic crisis could be the rekindling of historical precedent. In other words, working with the State of Michigan, Detroit could develop a recovery plan which would provide necessary funding for the recovery. Long term, such an approach is likely in the best interests of creditors, including employees and retirees. It is only through a robust recovery plan that creditors, including employees and retirees, will be paid to the fullest extent possible.”
Mr. Spiotto emphasized the importance of removing urban blight that has plagued the progress of the city as an integral part of Detroit’s recovery plan. Recent figures point to over 80,000 blighted properties in and around Detroit.
The role of pensions should not be understated, he said. “Pensions are important because they affect the people who are critical to the recovery but we cannot crowd out the funding of essential governmental services necessary for recovery. Any Adjustment of Pensions should be linked to paying everything that can be paid that is sustainable and affordable after funding the Recovery Plan and essential services and hardwiring those affordable payments of pensions with a dedicated source of payment.”
He recommended that a “safety net” for pensions be built into the Recovery Plan as compensation for adjustments it provided. This safety net would guarantee benefits to retirees at least equal to the Social Security benefits they are not eligible to receive and fund it through a governmental or private insurance program.
“Chapter 9 Bankruptcy is only a process and not a solution,” as he pointed out. “The reduction of debt without a Recovery Plan does not solve systemic problems. Without a Recovery Plan – which is a solution – the mistakes of the past can be repeated.” Detroit currently stands at a crossroads; however, it is beyond dispute that a sound Recovery Plan and reinvestment into infrastructure and government services can help bring Detroit back, and position it for a brighter future.
The full text of James Spiotto’s Testimony presented at the Detroit Bankruptcy Forum is available here.