Detroit's state-appointed emergency manager sliced into the accrued benefits of pension fund participants in a plan of adjustment filed in U.S. Bankruptcy Court on Feb. 21, while the city would not be required to make any pension contributions from its general fund until 2023.
Funding for pension contributions is dependent on several moving parts, and benefits would be slashed further if any part of the plan falls apart.
Under the exit plan filed by Kevyn D. Orr, the city's emergency manager, funding for the two city pension funds — the $2.77 billion Detroit General Retirement System and $3.4 billion Detroit Police & Fire Retirement System — would be contingent upon an agreement between the state, several private foundations and the Detroit Institute of Arts to raise about $820 million to fund the pensions and preserve the city-owned art collection.
Even under that funding arrangement, general employee participants would see their benefits cut 34%, while police and fire employees would receive a 10% reduction. However, if members approve the adjustment plan in a “timely” manner, the decreases would be 26% for the general employee fund participants and 4% for the police and fire fund, according to the plan of adjustment. Cost-of-living adjustments would also be eliminated, and there would be cuts to retiree health-care benefits.
James E. Spiotto, managing director of Chapman Strategic Advisors LLC, Chicago, and Chapter 9 bankruptcy expert, said the outside funding is “a creative way of adding more value in a difficult situation.”
Mr. Spiotto said there is precedent for senior creditors giving value to junior creditors because it does not take additional assets off the table. He believes that would work the same for a third party, in this case foundations committing money to pension contributions, but could be more difficult for a planned $350 million contribution to the city from the state because the governor has said the money could be used only for pensions.
In January, Gov. Rick Snyder and legislative leaders announced they are working to allocate up to $350 million from state tobacco settlement revenues strictly for Detroit city pension expenses. The allocation has not been approved at this time. Mr. Orr said Feb. 21 he is hopeful state officials will provide that piece of the funding puzzle.
The rest of the pension money would come from the DIA raising $100 million over the next 20 years and an “irrevocable commitment of at least $365 million by the foundations,” according to the exit plan.
A coalition of foundations already pledged in January to commit at least $370 million to help cover pension obligations. The group includes the $10.9 billion Ford Foundation, New York; $8.2 billion W.K. Kellogg Foundation, Battle Creek, Mich.; and $3.3 billion Kresge Foundation, Troy, Mich.