Pension Plans And The Detroit Municipal Bankruptcy
Please read the preceding articles of this series on pensions plans and the Detroit municipal bankruptcy to gain a better context and understanding of this article.
The plan proposed by the city of Detroit in its municipal bankruptcy in late July of 2014, was accepted by approximately 82% of the Police and Fire Retirement System and by about 73% of the General Retirement System retirees and current Detroit employees. The majority of bondholders disapproved of the bankruptcy plan. Also, insurers of Detroit’s debt, were strongly opposed to the plan.
The creditors of defaulted pension certificates of participation or COPs, unanimously opposed the plan. These certificates total approximately 1.47 billion dollars. These are certificates that guarantee payment of the pension debt. COPs are essentially insurance that such pensions will be paid if the purchaser of such insurance defaults or is unable to pay. Syncora Guarantee Inc and Financial Guarantee Insurance Company, which both guarantee payment of the pension debt, are both adamantly opposed to the Detroit bankruptcy plan offering.
The Detroit bankruptcy plan only offers pennies on the dollar the COPs. However, the police and fire retirees will receive pursuant to the plan, their entire pension and only small reductions in the cost of living increases implemented in their pensions. The Detroit bankruptcy offers all other Detroit employees, both current and retired, reduced pension benefits and no cost of living adjustments.
It is clear why the majority of the police and fire union participants are in favor of the Detroit bankruptcy plan and the majority of the certificate holders oppose the plan. It is difficult to understand how such a plan could possibly be approved by the bankruptcy judge. There is nothing fair or equitable about the proposal by the city of Detroit.
Further, if the COPs are left with little or no compensation, other cities and states will find it more difficult to secure willing investors or the rates paid by such government entities would be certain to increase, due to increased risk.
Juliet Moringiello, a law professor at Widener Law School in Pennsylvania, questions whether the bankruptcy judge could use his cramdown powers to implement the plan as proposed by the city of Detroit. The wide differing treatment of creditors in the Detroit bankruptcy plan raise questions as to whether that plan is fair and equitable or feasible.
Other private investors, such as purchasers of insured water and sewer revenue bonds and other Detroit government bonds amounting to about 5.2 billion dollars, are also being offered recoveries of approximately thirty cents on the dollar. The Detroit police and fire are being asked to make almost no concessions. It is easy to see how the plan offered by Detroit is destined for failure.