Detroit emerged from bankruptcy Friday, a little more than 15 months after filing for Chapter 9 protection, after bankruptcy court Judge Steven W. Rhodes approved the city's recovery plan, including settlements with the city's creditors.
The plan will eliminate the city's $18 billion of outstanding debt, of which $3.5 billion is combined liabilities for the $3.4 billion Detroit Police & Fire Retirement System and $2.77 billion Detroit General Retirement System.
To achieve the debt savings, the recovery plan devised by Kevyn D. Orr, the Detroit’s former emergency manager, will close the city’s two public pension plans to new employees on Dec. 31. Hybrid plans will be available on Jan. 1 for new employees.
The pension benefits of existing employees and retirees covered by the General Retirement System will be cut by 4.5%. Pension benefits were not cut for participants of the Police & Fire Retirement System, but guaranteed cost-of-living increases were cut for beneficiaries of both public defined benefit plans.
During Friday's hearing in U.S. Bankruptcy Court in Detroit, Mr. Rhodes called the settlement allowing the state of Michigan off the hook for pension underfunding reasonable, but he noted that it is on the “lowest end of reasonableness.”
Mr. Rhodes told the court that even though the Michigan Constitution does not trump federal bankruptcy, it does give reason to give retirees better treatment, adding that the bankruptcy process does discriminate against creditor classes, but not unfairly. “Fairness and unfairness are a matter of conscience,” he stressed.
Trustees of the General Retirement System said in a statement released Fridaythat they are “relieved that this turbulent period in Detroit's history and in our pensioners' lives has come to conclusion.”
Settlement of the pension obligations hinged on donations totaling $366 million from a diverse group of Detroit area foundations.
The Foundation for Detroit's Future was created to collect the foundation grants, make distributions to the two city pension funds, and “monitor the city's compliance with ongoing grant conditions, including proper pension fund oversight and the provision of status reports,” said a statement released Friday from the Detroit Foundation Funders Group.
Crain's Detroit Business reporters Amy Haimerl and Sherri Welch contributed to this story. CDB is a sister publication of Pensions & Investments.