Detroit Bankruptcy

Jack Martin was over 70 years old, a respected Certified Public Accountant (CPA) who had his own business and was once the Chief Financial Officer (CFO) for the U.S. Education Department. He was an ex-marine and had the gravelly voice of a drill instructor that commanded respect. He was the boss, but he was new to City government and needed all the help he could get. Jack was appointed by the Governor in May 2012 to be the City of Detroit’s CFO to help Mayor Bing get the City’s finances in order.

The City’s finances and accounting system were in shambles. The Kilpatrick Administration had cut the Finance Department in half. I rose very quickly to the top management level because of the retirements, resignations, and layoffs.

Norman White who was appointed CFO by Kwame Kilpatrick brought me into Finance in February 2008 to help get the 2006 Comprehensive Annual Financial Report (CAFR) out which was nearly two years past due.

On June 12, 2013, Jack Martin came into my office and said, “Kevyn says not to pay the POCs [Pension Obligation Certificates].” I said “Are you sure that is what he wants? We have never defaulted on a debt payment in the history of the City, and we have sufficient cash to make the payment.” Jack said, “Send Kevyn an e-mail and ask him.”

I was stunned. I couldn’t believe we were going to default on a debt payment even though we had enough cash to make the payment. Kevyn Orr had been the City’s Emergency Manager (EM) since March 2013.

However, we were insolvent, “robbing Peter to pay Paul” during the past five years to enable the City’s General Fund to make the priority payments such as payroll and debt service. We owed the two pension funds a total of $95.0 million and other City Funds $170.0 million on June 30, 2013. The City’s debt ratings were below investment grade, and we were heading towards bankruptcy.

Below is the EM’s correspondence to me that set the whole bankruptcy into motion.

“Yes, please hold the payment. Thank you.” [1]

The City had sufficient cash to make the POC payment but choose to default to set the bankruptcy in motion.

My City/employer was dying and so were my parents. Both had gone downhill since 2003. I was feeling very stressed and was depressed. I told my wife, Diane, that we had defaulted on the debt payment, and it was likely the city was going to declare bankruptcy. I said we could lose our healthcare and possibly our pensions.

In past years I joked with her that I was glad that I resigned from K-Mart in 1980 because they eventually went bankrupt. I told her it was good I worked for the City because it would never go bankrupt. The State wouldn’t allow it or so we thought.

My wife was upset. She said she had spent nearly twenty years in the City and now we were going to lose our retiree benefits and pension. She asked, “Why did I move here and waste twenty years of my life?” We had seen our neighborhood deteriorate. She didn’t like the blight and the negative environment we lived in. At one time it was known as “Copper Canyon” because a lot of Detroit Police Officers lived there. With the lifting of residency requirements in 1999 most of the “Cops’ moved away to the suburbs. After the “Great Recession” of 2007–2009 and the subprime mortgage crisis our neighborhood hit the skids when many of the new homeowners were unable to pay their mortgages and property taxes. Many of the houses were foreclosed on. Renters and squatters began to move in. The drug trafficking and nightly gunfire contributed to our declining quality of life. We felt more isolated and rarely left the house. We were fearful of burglaries which were frequent in the neighborhood. I never thought I would have security doors and an alarm system, but I did. I bought a shotgun and later a handgun and I felt somewhat safe. There was a time I did not want any guns but now I felt I needed them for protection.

At nearly 57 years old, I was near the end of my working career and looking forward to a nice retirement when I turned 60 in three years with a good monthly pension check and full health benefits.

The Detroit News reported on the causes of the City’s bankruptcy on November 13, 2014:

“Decades of dysfunction, marked by a long record of political corruption, fiscal mismanagement and population flight, worsened the hollowing out of public schools and accelerated a steady exodus of business, industry and jobs. Tax revenue declined, property values slumped, paying property taxes became a voluntary exercise, and people left — a population decline of roughly one third in the decade beginning in 2000.[2]

Detroit was a municipal basket case, the nation’s poorest major city. Exacerbating its plight were the collapse of two hometown automakers, a global financial meltdown that tipped the country into recession and the chronic inability of City Hall to deliver residents basic city services despite having the highest tax rates in the state. People who could leave did.

As a candidate for governor in 2009 and 2010, Snyder was dismayed by the decaying conditions in Detroit, its poor political leadership, the appalling lack of services. As a candidate, he campaigned in the city, drawing hoots of derision from fellow Republicans saying he was wasting his time. A month before he took office on Jan. 1, 2011, his pick for state treasurer, former House Speaker Andy Dillon, asked investment bankers to begin assessing the city’s financial health.

Dillon, a former investment banker, pushed Treasury Department officials to scrutinize Detroit’s finances, quietly hiring a major accounting firm, Ernst & Young, to study the city’s books. A preliminary report in May 2011 predicted Detroit’s cash on hand would be $13 million by July 1. That’s enough to run the city for just four days. By December, Dillon ordered a financial review of the city’s books under Public Act 4, a revised emergency manager law that unions and their allies in the Democratic Party vowed to repeal in the 2012 election.

The results were sobering: The city had run annual budget deficits ranging from $155 million to $331 million for seven consecutive fiscal years. Worse, the review concluded, Detroit’s liability for retiree health insurance approached $5 billion, and a large chunk of long-term unsecured debt totaled $12 billion.

Bing and a 5–4 majority of the City Council agreed to a consent agreement with the state Treasury obligating Detroit to make reforms. The city mostly failed to deliver over the next 11 months, underscoring chronic infighting and its delusional leadership.

On January 24, 2013, Snyder had signed a revised version of a controversial emergency manager law that was rejected by voters during the November election. The new law, Public Act 436, took effect on March 28, 2013, and gave the Detroit EM extraordinary control over all Detroit financial matters, and the ability to recommend to the governor and state treasurer that the government enter Chapter 9 bankruptcy.

A year after ordering the city’s first financial review, and eight months into the consent decree, little had improved. A financial consultant hired by the city met with Dillon privately to show him two “very chunky” bills for pension and employee health care that would dip the city’s cash reserves below a $50 million threshold Dillon considered a financial tripwire.” [3]

Former Councilmember Sheila Cockrel wrote an astute article on Detroit’s issues prior to the bankruptcy:

“Democracy requires accountability from elected officials and citizens. It means that balancing the books “on paper” and kicking the can down the road while the sacred cows of work rules and collective bargaining agreements remain untouched is not acceptable when your revenue consistently fails to meet the projections. Year after year, bonds are sold to cover expenses, which is the equivalent of paying your credit card bill with another credit card, over and over again. When local government cannot ensure basic services that allow residents to pump gas without being assaulted or carjacked; when parents have to send their children out of town for the summer because death by homicide is statistically probable for young black men; when the basic right to life itself is threatened-this is a crisis that dwarfs everything else. It is a time to act. To take a risk. When simply taking an evening walk or sitting in your front or back yard leaves you uneasy, then your liberty is constrained. When the emotional exhaustion of dealing with fear is palpable in people’s faces and conversation-then the pursuit of happiness has been lost.” [4]

The Governor had enough and decided it was time to get serious. I’m pretty sure by this time he decided that a bankruptcy was the only solution. Snyder had worked on restructurings before his political life and knew what he was doing. Still many people believed the State would never let the City of Detroit file for bankruptcy. No other City in the State in recent history had filed for bankruptcy. The Detroit Public Schools (DPS) should have been put through a bankruptcy but never was. It was to come out later that DPS was not put through bankruptcy because it would have cost the State too much as the State was responsible for their pensions and taking pensions away from teachers was more than Snyder wanted to deal with.

“I thought that was game over at that point — and the governor agreed, and that’s when we started the second review,” Dillon said in an interview. “I didn’t think that they could avoid emergency status at that point.”

Detroit’s Mayor Dave Bing wrote [5] the following on August 30, 2009:

“Because our city faces one of the worst financial, educational and social crisis of the past century, the time for pseudo-leadership has passed. Gone must be the days of rhetoric without action, style without substance and promises with no potential. Too many elected officials have drastically failed to do so, and now we are forced to deal with the consequences and clean up the mess.”

I remember seeing Bing alone walking through his office. He looked distraught. He seemed lost and defeated. I actually pitied him. He was right that much of the City leadership — Councilmembers, Union officials and activists were out to be popular and not willing to face reality and make the tough and unpopular decisions. The activists who spoke in front of City Council made me sick as they disparaged the Mayor and some Councilmembers with their ignorance. They either didn’t understand the magnitude of the problem which the evidence was all around them or chose to ignore it to be popular with the public who had been misled. For many of them it was in their interests to maintain the status quo so that they could retain their popularity and jobs. In any case, many believed that the State would not take over the City nor put it into bankruptcy. Top City officials like Kriss Andrews (CEO) and Jack Martin told me that they did not believe that there would be a bankruptcy for the City. I didn’t think it would really happen, although I believed it was possible absent a State or federal bailout.

The City hired the Jones Day law firm based in Cleveland to lead its restructuring efforts. Kevyn Orr was a member of the firm’s Washington based bankruptcy unit and veteran of Chrysler LLC’s historic bankruptcy. He attended the University of Michigan Law School at the same time as Snyder and Mike Duggan (Detroit’s current Mayor).[6]

Rich Baird, an advisor to the Governor, found Orr to be an ideal candidate for Detroit’s EM. Baird arranged an interview for Orr with the Governor. On March 14, Snyder introduced Orr, who agreed to resign from Jones Day and take a massive pay cut to be the EM. Mayor Bing publicly opposed the appointment.

With the appointment of a bankruptcy attorney as the EM, it was obvious where the Governor was going with Detroit.

Orr sometimes spoke without thinking. In the beginning of his emergency management of Detroit he said:

“Now look, I’m a trial attorney. I can cut somebody’s throat and leave them to bleed out in the gutter with the best of them. But I didn’t want to do that. That’s not my role in this job. My role in this job is sort of the zen of emergency management.” [7]

Orr graduated from the University of Michigan law school in 1983. He worked as a litigator for the Federal Deposit Insurance Corporation (FDIC) and shortly afterward transferred to the Resolution Trust Corporation (RTC). He supervised complex investigatory and bankruptcy matters handled by the agency. He joined the Department of Justice in 1995 as deputy director of the Executive Office for United States Trustees. In 2001, Orr joined the Jones Day law firm where he served on the firm’s Advisory Committee and was the Partner for Hiring and Diversity.

Orr began his 18-month term as EM on March 25, 2013. Orr said, when he was offered the EM position:

“Initially, I didn’t want to do the job.” But “a number of people just explained to me that it’s just judgment calls, common sense,” he says. “And frankly, the city was at such a dire level, it was all upside — unless you’re going to take it to a more corrupt level than it’s ever been.” [8]

Orr was quoted in the Wall Street Journal as saying:

“For a long time the city was dumb, lazy, happy and rich,” he explained. “Detroit has been the center of more change in the 20th century than I dare say virtually any other city, but that wealth allowed us to have a covenant [that held] if you had an eighth grade education, you’ll get 30 years of a good job and a pension and great health care, but you don’t have to worry about what’s going to come.” [9]

Orr was surrounded by consultants. Supposedly the best and the brightest. He had the best bankruptcy attorneys backing him. He spoke intelligently and well and seemed to know what he was talking about. He seemed to be a strong leader. He and his team were effective in putting the City into bankruptcy and getting it out of bankruptcy in an expeditious manner. He was the General Patton of Emergency Managers.

The City could no longer afford pensions and retiree health care. For the City to improve its finances there would have to be cuts to these legacy costs. This was the focus of the EM.

There were 13 City retirees who collected more than $1 million in total pension payments.[10] There were 23 retirees receiving more than $100,000 annually. The top annual pension was $131,225 collected by a former PLD Director.

More than 8,000 former police officers and firefighters drew pensions, which averaged nearly $30,000 in FY 2012. Another 11,970 former city workers or their spouses drew pensions that averaged $19,600.[11] All of them were entitled to city-paid health care, which cost the city more than $177 million in 2012.

In May 2013 the EM issued his “Financial and Operating Plan”. The plan summarized the financial condition of the City and the strategic and operational considerations facing the EM and presented the EM’s preliminary views on the development of a restructuring plan with respect to the City. It was anticipated that the restructuring of the City would focus on three primary areas essential for the City’s successful rehabilitation: (1) improving public safety and promoting reinvestment in the City; (2) evaluating and restructuring the City’s long-term liabilities; and (3) evaluating and streamlining the City’s operations.[12]

On June 14, 2013, the EM presented his restructuring proposal to an audience composed of approximately 150 representatives of the City’s various creditors. The restructuring proposal contained extensive information regarding the state of the City’s finances and operations and a comprehensive proposal to provide needed investment in the City and restructure the City’s obligations. Highlights of the proposal are summarized below.

“The EM offered all unsecured claims of GO (General Obligation) bonds and POCs (unsecured) and legacy costs such as unfunded pension liabilities and retiree health care a pro-rata share of $2 billion of unsecured bonds/notes at 1.5% annual interest. Unsecured creditors would receive roughly 10 cents on the dollar of what they were owed.

Retiree health care was to be effectively eliminated and retirees forced to use the ACA (Affordable Care Act).

Claims for the underfunded pension liabilities would be exchanged for a pro rata share of the principal amount of the new notes. As a result, there would be significant cuts in accrued, vested pension amounts for both active and currently retired persons.”

The Wall Street Journal reported on Kevyn Orr’s comments about negotiating with the unions:

“I went to the labor class and asked, ‘Please, let’s negotiate.’ They sued the governor and treasurer. Next week another union joined them on that lawsuit. The next week, they sued me and the governor,” he recalls. “How long do I have to stay on the schoolyard when you’re hitting me on the upside of the head and then you run to the teacher and say I won’t be your best friend? This is fifth grade stuff.” [13]

The EM’s proposal and attempts to negotiate with creditors was weak and intended to fail. On the same day as the EM’s proposal to the creditors we defaulted on the POC payments setting the bankruptcy in motion. Also on June 14, 2013, the City stopped making payments related to unsecured funded debt and legacy liabilities, with the exception of retiree healthcare benefits and certain vendors providing essential goods and services.

The City’s credit ratings in 2013 reached historic lows and were below investment grade. No major U.S. City had a lower credit rating than Detroit. On June 17, 2013, S&P and Moody’s had lowered Detroit’s credit ratings to CC and Caa3, respectively.[14]

Detailed below are the highlights from the City’s CAFR for FY 2013 which reported the City’s financial condition on June 30, 2013, 18 days before the bankruptcy filing.

“The Unassigned General Fund Balance had a $132.6 million cumulative deficit at June 30, 2013, a $194.0 million decrease from the $326.6 million deficit at the end of FY 2012. The decrease was primarily due to the $138.6 million in proceeds from borrowing $129.5 million of limited tax general obligation bonds with maturities extending to November 2032, issued at a premium of $9.1 million, with the assistance of the State of Michigan through the Michigan Finance Authority. Also, significantly contributing to the decrease in the General Fund deficit was the default on the $96.9 million required pension contributions at June 30, 2013.

The City’s General Fund agencies made substantial efforts to reduce the deficit in FY 2013 including the: (1) $81.0 million reduction in salaries and wages through 10% pay cuts, furlough days, attrition and other measures; (2) $15.0 million increase in income tax revenue due to stronger collection efforts and an improving local economy; (3) $9.7 million increase in State Revenue sharing; and (4) $13.3 million reduction in benefits costs.

The City’s pension obligations, retiree benefits, debt service, and derivatives associated with the POCs, were a substantial financial challenge for the City and were a contributing factor in the City’s bankruptcy filing. On June 30, 2013, a total of $296.5 million of the negative fair value of derivatives related to interest rate swaps associated with the City’s POCs. The City had approximately $1.5 billion long-term obligation payable on June 30, 2013, for the POCs, including a $23.1 million principal payment due June 15, 2013, that was not paid when due. The obligations of the City’s two pension plans for retiree pensions totaled $7.5 billion on June 30, 2012, of which approximately $985 million was unfunded according to the pension plans’ actuarial estimates. In addition, the City had a $5.7 billion unfunded obligation for other postemployment benefits, mainly retiree health care, on June 30, 2011. The primary government’s pension, retiree benefits, and other pension related costs totaled $694.6 million, which was 28% of the City’s total expenses for the year ended June 30, 2013.

The General Fund’s hospitalization, dental, vision, and life insurance benefits costs were major contributors to the structural deficit. For FY 2013, these costs were $193.4 million, down $14.3 million from $207.7 million for FY 2012. The portion of the FY 2013 costs relating to retirees was $142.8 million, or 73.8% of the total amount. The portion of the FY 2013 costs relating to active employees’ costs was $50.6 million, or 26.2% of the total amount. The number of retirees exceeded the number of active employees by a factor of two to one.

The City of Detroit was insolvent on June 30, 2013, as the General Fund liabilities exceeded its assets by $73.0 million and cash and investments on hand totaling $102.2 million were insufficient to meet obligations then due. On June 14, 2013, due to liquidity constraints, the City defaulted on its pension obligation certificates of participation (“POCs”) principal and interest payment due totaling $41.0 million ($33.3 million due from the General Fund). In addition, as of June 30, 2013, the City had defaulted on $105.6 million ($96.9 million from the General Fund) in pension contributions due to the General Retirement (GRS) and Police and Fire Retirement (PFRS) Systems. Also, the City’s General Fund owed the Benefits Fund $44.4 million on June 30, 2013. Furthermore, as of June 30, 2013, the City’s General Fund had borrowed $69.6 million from its Risk Management, Solid Waste and Vehicle Funds to fund other obligations.”

The City’s General Fund under the State’s oversight greatly reduced costs and would have had only a slight deficit without the borrowing proceeds for FY 2013. However, the reduction in costs did adversely impact city services such as public protection and transportation for FY 2013.

The City’s unfunded pension liability was a huge burden on the City. A major contributor to the GRS’s unfunded liability was the practice of paying bonuses to retirees and employee retirement annuities.[15] For years when the GRS Fund had earnings in excess of the required 7.9%, The Board would authorize a bonus which could be a 13th check to retirees, a bonus paid to the employee retiree annuity fund and a credit to the City’s annual required pension contribution. Many other retirement systems in the Country had similar bonus practices. [16] The GRS board paid $756.2 million to the active employees’ annuity fund, $195 million as a 13th check to retirees, and $445.3 million to the City from 1985 to 2007.[17] If the bonuses and credits had not been granted the GRS would have been in a better financial position even considering the investment losses sustained in 2008.

The Annuity Savings Fund (ASF) was a voluntary program operating within the GRS pension plan which allowed participants to create an account and then contribute 3%, 5%, or 7% of their gross pay, after tax, to that account. The contributions paid in by ASF participants were invested with the rest of the GRS pension assets. Upon retirement, the contributions made to an ASF account, and the interest accrued thereon was paid either in one lump sum or could be annuitized and paid on a monthly basis in addition to the individual’s regular monthly pension payments.

The problem with the bonuses, which later were called the excess distributions from the ASF, was that in years when the pension and annuity assets took a loss, or the earnings were less than 7.9% the annuitants still were guaranteed and received 7.9% of interest on their balance. It was a no-lose situation for the annuitants but the City had to make up the difference. The bonuses were a detriment to the City and contributed to the underfunding of the GRS and caused the City to have greater annual required pension contributions significantly contributing to the City’s deficits and insolvency.

Mayor Archer backed a 1996 ballot proposal that asked voters to block the distribution of excess earnings to pensioners. It failed because of intense Union opposition.

The City Council stopped the bonuses in November 2011 by enacting an ordinance to prohibit them. The EM and his consultants called the bonuses a significant factor in the large unfunded liability of the GRS.

The bonuses paid by the GRS were very generous during the Kilpatrick administration.[18] Considering the corruption that was involved with the pension systems under the Kilpatrick administration, it was plausible that these bonuses were granted in exchange for approving certain pension fund investments.

The Auditor General’s Report to the EM dated October 25, 2013, identified 23 annuity accounts with over a $1.0 million balance. The highest single account was $1,879,729. The person had over 50 years of service. The person only contributed $54,868. The average employee contribution for the 23 accounts were $81,142 and the average balance for the 23 accounts was $1,277,082.

The Detroit News story on the bankruptcy dated November 13, 2014, detailed the struggle over the Detroit Institute of Arts (DIA) artwork which is summarized below.

“City restructuring consultant, Ken Buckfire, of the firm Miller Buckfire, a month before the appointment of the EM proposed that the DIA art could be sold or leveraged by the City to generate cash. Buckfire proposed several options: explore the sale of art; establish lending programs that would make DIA pieces available to other museums; or reach a long-term lease agreement obligating the DIA to make annual payments over 20 or 30 years to the city, creating a new municipal revenue stream.[19]

“…for the governor, weighing a calculated risk that would culminate in Chapter 9, Dillon warned Buckfire that messing with the art is “a lose-lose” for Snyder.” “Let the creditors go after the art,” the treasurer said. Selling or “monetizing” the art would imperil a three-county millage that generated more than $23 million annually for the museum; would savage the museum’s reputation and cement Detroit’s image as a cultural backwater; would all but guarantee that masterpieces from Bruegel and Van Gogh, Rembrandt and Rodin would end up in the hands of foreign collectors never to be seen again by the public.”

In an email written just after Memorial Day, Orr’s communications director detailed the reality facing the museum should the city file for bankruptcy. “Our job is not to protect art, but to save Detroit,” Bill Nowling, a former Republican operative and member of Snyder’s 2010 campaign team, wrote to Orr. “We have said ALL options are on the table and being considered. We meant it. This is a financial emergency and financial emergencies require extraordinary measures, including, maybe, selling art.”

Nowling added “I don’t want to pack up the art, but I wasn’t hired to protect it and neither were you. We have a job to do and we can’t afford to get bogged down with side issues that are essentially moot. Our responsibility is to statute and the citizens of Detroit. If Al Taubman, Keith Crain don’t like it, they can buy the art and gift it back to the DIA or they can roll the dice and take their chances.”

Even the governor, when pressed by the Detroit News in late May, acknowledged the DIA’s holdings could be a target for creditors.

Richard Manoogian wined and dined Kevyn Orr to convince him not to liquidate the DIA art. They met at Manoogian’s home, called The Pines, on Mackinac Island.

Orr wanted his wife and their two young children to see it over the July Fourth holiday, to experience the Grand Hotel down Lake Shore Drive from the summer home belonging to the chairman emeritus of the DIA. He also wanted the chance to chat with one of the museum’s most influential living benefactors and to send a message: The museum’s assets could become targeted by creditors and could, in theory, be sold by the city.[20]

Orr told Manoogian he hoped leaders of the DIA and its benefactors could find a solution to the undeniable facts that the museum’s art is city owned and the city’s assets would need to be valued should the city file Chapter 9 bankruptcy.”

As a City employee who lost much in the bankruptcy, it was hard stomaching the politics and influence of the State’s elite. The efforts to save our pensions and benefits and the efforts to save the DIA and take it away from the City were at different ends of the political spectrum.

The power that people like Gargaro (DIA chairman) and Manoogian had was impressive. Snyder and the State’s political leadership cultivated that power and used it to meet their goals. It was another case in the long history of this world of the wealthy using their power to get what they wanted.

My wife being an artist and teacher at the Center for Creative Studies (CCS) which was next door to the DIA, was conflicted. She had sacrificed much to live in the City and now we were faced with the loss of my pension. She didn’t want to see the artwork sold but she didn’t want me to lose my pension either.

I respect art and the history behind it. I think it’s important for major cities to have cultural institutions like the DIA. I think taking the DIA away from the City was reprehensible. I don’t think selling the DIA art would have been any better than the Grand Bargain was in saving us cuts to our pensions and other benefits.

The real issue was that the State and its elected leadership including Governor Snyder had a Constitutional obligation to protect the City’s pensions. If the City could not meet those pension obligations than the State had the responsibility to meet them. The pension cuts should never have been an issue. Snyder violated the State’s Constitution, which he swore to uphold, by authorizing the City to file for bankruptcy where pensions could be reduced.

Michigan is a “home rule” State, which means the local governments are self-governing with limited autonomy and power. However, due to legal restrictions on local governments for raising revenues, the State really rules their local governments.

If a municipality is unable to provide basic services to its residents, the State itself could be obligated, as a political if not a legal matter, to provide adequate funding for those purposes. The State of Michigan’s charitable instincts were lacking when it came to distressed local governments.

President Obama, Snyder, and the State of Michigan were not going to rescue Detroit.

Governor Snyder and the State did not want to pay Detroit’s pensions and did not want to set a trend for other communities to follow in passing their pension obligations on to the State. Snyder and his team became convinced that the best way to save Detroit and return it to solvency was to put it through a bankruptcy so that its debts, mainly pensions and retiree health care, could be significantly reduced. Taking on the biggest City in the State set a tone that other Michigan cities needed to do everything in their power to avoid Detroit’s fate.

Orr said his primary responsibility was to the city’s 700,000 residents, not its capital market creditors and 30,000 retirees and workers. “The vast majority of people are like, ‘We just want it fixed even if we don’t like the emergency manager.’” [21]

As with bankrupt businesses, bankrupt cities are often saddled with more problems than just too much debt. Federal law does not require local officials of bankrupt cities to identify and root out such inefficiencies; nor does it empower bankruptcy Judges to do so.[22] Municipal dysfunction may be a cause of the underlying fiscal distress but may also result from it. Having focused on financial problems, State and local officials have neglected various solutions over the years.

Ignoring the root causes of poverty and racism that caused the City to financially fail was a major mistake by Orr, Governor Snyder and the State. The poverty and racism in the State set impoverished local governments up for failure. Local governments, like Detroit, with a low tax base will always struggle financially and will never by themselves be able to provide equitable essential public services as the wealthier cities can. As a result, their citizens will always be at a disadvantage when competing for jobs and a better quality of life.

The City’s financial problems were not as overwhelming as its civil and social problems. The poor quality of education, high unemployment, crime and poverty greatly contributed to the City’s financial problems through the flight of the upper and middle classes to the surrounding suburban cities resulting in the erosion of Detroit’s tax base.

Living in the City I observed a huge underground economy from the neighbor who sold televisions out his front door to another neighbor who did house repairs for cash or checks in his name so that he wouldn’t have to pay taxes. The high homicide rate indicated a large economy in illegal activities such as narcotics trafficking. My wife and I witnessed the occasional gunfight. We saw the residue left on my street such as empty pill packets, needles, and bullet shell casings. Obviously, these entrepreneurs were not paying their Detroit income taxes.

The City’s crime rate was five times the national average. DPD was unable to meet the national average response times of 11 minutes for Priority One calls which required an immediate response. As of July 18, 2013, DPD’s Priority One response time was approximately 58 minutes.[23]

Until the City can resolve its poverty, education and crime problems, it will not be able to attract residents and build a suitable tax base to provide its citizens with a satisfactory quality of life. There will be a large cost to the region and entire State if these problems are not resolved.

Why would you want to live in a City where your home value was depressed? You paid the highest insurance rates for home and automobile. You paid high property and income taxes. The education system was poor. Your child was at risk attending school. Crime was out of control. Gunfire outside your home was a common event. Burglaries were constant in your neighborhood. Some of the neighbors were stealing water and electricity from the utility providers. Drug sales were occurring on the streets and at the house around the corner. You didn’t go on vacation because of the fear someone would break into your house.

I think we all could sense the City was going to file for bankruptcy. Still, it was a surprise and I thought what now? In a bankruptcy, creditors stand to lose quite a lot. What would we City employees lose? Pensions were protected by the State constitution so we didn’t think our pensions would be touched until Judge Rhodes ruled otherwise. As part of the City’s restructuring attempts prior to the bankruptcy, I had advocated for having retirees pay more for their health care. I thought the retiree health care would be severely cut in a bankruptcy.

The former State Treasurer, Robert Kleine, who served under Governor Granholm, wrote an article, “Detroit did not have to go bankrupt”.[24] He said:

“It could have been prevented with more urban-friendly policies from the state. However, the last governor to really understand the importance of Detroit to the state and to be fully committed to helping our cities was Gov. William Milliken. His successors, both Democrat and Republican, simply ignored Detroit and, in fact, often pushed policies that encouraged its failure, from limiting mass transit opportunities to pushing through an end to residency requirements for city workers.

It is easy to blame Detroit’s problems on corruption, unions and overly generous pension benefits. None of these factors were the primary cause of bankruptcy. The main factor was the steady erosion of the tax base and the city’s need to borrow money to maintain even a minimal level of public services.

Detroit borrowed money to stay afloat. In hindsight, this may have been unwise, but with declining state support (due in large part to major tax cuts accepted by state policymakers in a futile effort to resurrect the factory economy), borrowing appeared to be the only option to maintain even a minimal level of public safety and basic services. Better financial management would have helped but would have only delayed the inevitable.

Instead of bankruptcy, Detroit had several options that it could have taken, some simultaneously. But none are practical given the current political environment that continues the past hostility to the city that has characterized the state’s relationship to its largest city since 1982.

Detroit may have mismanaged finances, but the state’s cuts to revenue sharing doomed the city. One option would have been for the state to restore revenue sharing to previous levels which would have been worth nearly $200 million to Detroit. The state could have afforded to do this if it had not cut business and income taxes in 2000, and then given business another $1.8-billion tax break in 2011.

Detroit’s income tax rate used to be 3.0% but was reduced to 2.4% over a several-year period in exchange for a promise from the state that revenue sharing would not be cut — an agreement the state did not keep. The income tax rate could be returned to 3.0% and to offset the negative effect of a higher rate on the city, the state could provide a special credit. (Increasing the income tax rate back to 3.0% would raise about $75 million annually.) Also, the state could take over income-tax collections for Detroit. According to one estimate, Detroit could potentially collect at least $50 million more annually with an improved collection process. For a state sitting on a $500-million rainy day fund, these policies are eminently affordable. In fact, as a candidate, Rick Snyder proposed special tax credits to attract young talent to urban areas, but as governor, Snyder has been noticeably silent about such positive incentives. (In fact, revenue sharing today is well under the level when he took office, despite the state’s “comeback.”)

Another option would have been federal aid, maybe specifically designed to clear abandoned properties and to maintain police and fire services.

A third option would have been for the state to pass legislation setting up regional police and fire districts supported by property taxes, as is done in some states. Public safety makes up more than half of Detroit’s budget, so this would make a huge difference to the city.

A fourth option would be tax-base sharing or regional government. This is done in many other states, and Gov. Milliken proposed a tax-base-sharing program back in the 1970s that, if enacted, would probably have prevented bankruptcy. Michigan’s archaic annexation laws encourage rent-seeking from those who use the city’s services for business or pleasure but choose to live outside the city and pay lower or no taxes.

I do not believe bankruptcy will solve the problem given Detroit’s inadequate tax base. Detroit cannot be a viable city without outside help, which no one is prepared to offer.

Detroit’s underlying problems are the result of the downsizing of the auto industry, racial tensions, meaningless jurisdictional boundaries, state neglect and inattention, and the Great Recession. Balancing the books in a technical sense will not address any of these fundamental issues.” [25]

On July 3, 2013, Gracie Webster and Veronica Thomas filed a complaint against the State of Michigan, Governor Snyder and Treasurer Dillon in the Ingham County Circuit Court. They sought a declaratory judgment that P.A. 436 was unconstitutional because it permitted accrued pension benefits to be diminished or impaired in violation of article IX, section 24 of the Michigan Constitution. The complaint also sought a preliminary and permanent injunction enjoining Governor Snyder and State Treasurer Dillon from authorizing the Detroit EM to commence proceedings under Chapter 9 of the bankruptcy code. They also sought an injunction preventing the defendants from authorizing any Chapter 9 proceeding for the City in which vested pension benefits might be impaired.[26]

Andy Dillon objected to what increasingly looked like a rush to bankruptcy. “I don’t think we are making a case why we are giving up so soon to reach an out-of-court settlement,” Dillon, the Treasurer, wrote in a July 10 email to Snyder and his team. “Looks premeditated.” [27]

Congress did not grant cities access to bankruptcy until the Great Depression. Municipalities are the legal creations of State governments, and up until the 1930s, it was held that Federal intervention into local government finances, as municipal bankruptcy would entail, was prohibited out of respect for the Tenth Amendment and states’ sovereignty. States did not have municipal bankruptcy laws because they were prohibited by the U.S. Constitution (Article I, section 10) from impairing the obligation of contracts — something only the Federal government can do.[28]

Despite their many financial challenges, local governments rarely seek solutions in bankruptcy. There have been approximately 640 municipal bankruptcies in the U.S. since 1937, when the current law was enacted. As a result, the bankruptcy of Detroit was more than unusual.[29]

Municipal bankruptcy was unique in other ways. In a corporate bankruptcy, for example, a company can be liquidated, and all of its assets can be sold off to pay its creditors. However, a City cannot be liquidated. Municipal bankruptcies are based on the principle that the City should survive and continue to provide public services. The goal is not to sell off City assets in order to pay down its outstanding debt.[30]

To access bankruptcy, federal law requires that a City pass a “cash flow insolvency test,” by which it demonstrates to the court that it truly cannot pay its contractual debt obligations on time and in full. The State government must authorize the filing. Cities can’t “declare” bankruptcy, and there is no constitutional right to municipal bankruptcy.[31] Kevyn Orr told us not to pay the debt service on the POCs in June 2013 to meet the insolvency test. While we did have cash to make that debt payment, we were not paying pensions and other obligations which were due. We were insolvent but we could have continued operating for some time.

There was no question that Detroit qualified for bankruptcy in 2012 and 2013 and likely long before that. Only by issuing debt was it able to continue to meet obligations as they came due.

Restructuring the City’s operations and finances were an important part of the EM’s job and the bankruptcy. The EM exaggerated the City’s debt and undercut the values of its assets to create support and justification for the City’s bankruptcy filing. However, no person knowledgeable of the City’s finances could dispute that the City was insolvent and in need of relief from its debts. Absent the State fulfilling its obligations, the bankruptcy filing was justified.

On July 17, 2013, Orr wrote Snyder for authorization to file bankruptcy on Friday, July 19, 2013. The EM’s Bankruptcy Recommendation Letter concluded with the following:

“In sum, despite aggressive cost cutting measures already implemented by the City and despite good faith negotiations (where they could be had), no reasonable alternative for the restructuring of the City’s operations and obligations exists other than through chapter 9. Without chapter 9 relief, there is no clear path for rectifying the City’s financial emergency and the City’s deteriorating financial cycle will not only continue but accelerate. As such, I respectfully recommend that the City be authorized to proceed under chapter 9 so that we may, at last, stop the City’s downward spiral and correct the City’s financial condition in a sustainable fashion.”

On the morning of July 18, the Governor sent his authorization to Orr placing no restrictions on the actions his EM could take.[32]

In the Authorization Letter, the Governor agreed with the EM that Chapter 9 offers the only feasible alternative to fix the City’s finances and to complete a sustainable restructuring for the benefit of Detroit’s approximately 700,000 residents. Based on the EM’s Recommendation Letter, the Governor determined that: (a) the City cannot meet its basic obligations to its citizens; (b) the City cannot meet its obligations to its creditors; (c) the City’s failure to meet its obligations to its citizens is the primary cause of its inability to meet its obligations to its creditors; and (d) the only feasible path to ensuring the City will be able to meet obligations in the future is to have a successful restructuring under the federal bankruptcy process.

Upon receiving the Authorization Letter, the EM issued an order directing the commencement of the City’s Chapter 9 bankruptcy case. Consistent with these approvals, on Thursday, July 18, 2013 (the “Petition Date”), the City filed a voluntary petition under Chapter 9 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Michigan at 4:06 p.m. on that day.

Attorneys representing the City’s pension boards and a group of UAW retirees filed a motion at 3:37 p.m. at the State’s 30th Circuit Court in Ingham County on that same day. They wanted a restraining order blocking Snyder and Orr from filing for bankruptcy — and raced to the county courthouse in downtown Lansing for an emergency hearing.[33] Michigan 30th Circuit Judge Rosemarie Aquilina appeared for the emergency hearing. She told the pension funds’ attorneys that she intended “to grant you your request completely.” [34]

According to the transcript of the hearing, it began at 4:15 p.m. on July 18, 2013. Almost immediately, counsel for the plaintiffs advised the Court that the City had already filed its bankruptcy case, nine minutes earlier, at 4:06 p.m. on that day. As a result, counsel asked for an expedited process. Judge Aquilina responded, “I plan on making a ruling Monday. I could make a ruling tomorrow, if push came to shove, but Monday probably would be soon enough. I am confident that the Bankruptcy Court won’t act as quickly as I will.” [35]

Later that day, the Court entered an “Order of Declaratory Relief” which stated:

“IT IS HEREBY ORDERED: PA 436 is unconstitutional and in violation of Article IX Section 24 of the Michigan Constitution to the extent that it permits the Governor to authorize an emergency manager to proceed under Chapter 9 in any manner which threatens to diminish or impair accrued pension benefits; and PA 436 is to that extent of no force or effect; The Governor is prohibited by Article IX Section 24 of the Michigan Constitution from authorizing an emergency manager under PA 436 to proceed under Chapter 9 in a manner which threatens to diminish or impair accrued pension benefits, and any such action by the Governor is without authority and in violation of Article IX Section 24 of the Michigan Constitution.”[36]

On July 19, 2013, one day after the City filed its Voluntary Petition, the State Court in Webster issued its final judgment holding that “PA 436 is unconstitutional and in violation of [the Pensions Clause]. The Judge stated:

‘‘[b]y authorizing Emergency Manager [Orr] to proceed under Chapter 9 to diminish or impair accrued pension benefits, [the Governor] acted without authority under Michigan law and in violation of . . . [the Pension Clause].” On July 18, 2013, Defendant Governor Snyder approved the Emergency Manager’s recommendation without placing any contingencies on a Chapter 9 filing by the Emergency Manager; and the Emergency Manager filed a Chapter 9 petition shortly thereafter. By authorizing the Emergency Manager to proceed under Chapter 9 to diminish or impair accrued pension benefits, Defendant Snyder acted without authority under Michigan law and in violation of Article IX Section 24 of the Michigan Constitution. In order to rectify his unauthorized and unconstitutional actions described above, the Governor must (1) direct the Emergency Manager to immediately withdraw the Chapter 9 petition filed on July 18, and (2) not authorize any further Chapter 9 filing which threatens to diminish or impair accrued pension benefits. A copy of this Order shall be transmitted to President Obama. Order of Declaratory Judgment, Webster v. State of Michigan, №13–734-CZ (July 19, 2013). (Dkt. #1219–8)” [37]

The Emergency Manager’s attorneys won the race to the courthouse in filing the bankruptcy and prevailed rendering the other court decisions moot. On July 19, 2013, Bankruptcy Judge Steven W. Rhodes was assigned to the Bankruptcy Case by the Chief Judge of the United States Court of Appeals for the Sixth Circuit.

Judge Rhodes was a graduate of the University of Michigan Law School and was a veteran Detroit jurist with experience overseeing complex bankruptcies. He had a reputation for efficiency and diplomacy from the bench, as well being the only bankruptcy judge in Michigan to have handled a Chapter 9 case — the bankruptcy of a small public hospital authority in Lenawee County. [38]

Under Chapter 9 of the Bankruptcy Code, actions by creditors to collect indebtedness the City owed prior to the Petition Date (July 18, 2013) were stayed, and certain other pre-petition contractual obligations could not be enforced against the City. The Chapter 9 filing enabled the City to continue to operate and provide services to its residents by freezing certain pre-petition debts until a Plan of Adjustment (POA) could be approved. The City paid certain pre-petition liabilities, including employee salaries, wages, benefits, and other obligations, during the Bankruptcy. Other unsecured obligations owed by the City at July 18, 2013, were subject to compromise in the bankruptcy process. The City stopped making payments related to unsecured funded debt and legacy liabilities, with the exception of retiree healthcare benefits and certain vendors providing essential goods and services.

Under Chapter 9 bankruptcy, the City could not be forced to sell assets. During the City’s bankruptcy the Detroit Institute of Arts (DIA) was seen by City creditors as having sizable assets that could be liquidated to pay them. Initially the City’s consultants and even the EM thought about the potential to sell artwork to satisfy creditors. The DIA Board and patrons were worried that the City might sell the art work.

In August 2013, the city hired the New York-based auction house Christie’s to begin appraising the 3,300 art works bought directly by the city unencumbered by donated funds or other covenants that might cloud legal title.[39] Creditors were pushing for the sale of the art to increase the settlement amount they would get beyond the 10 to 20 cents on the dollar that the City was offering. Orr could have decided to sell the art to get a deal. Also, the bankruptcy Judge could have denied Orr’s plan and pressured him to find more cash, which could have forced a sale of the art. [40]

On December 5, 2013, the Bankruptcy Court entered (a) the Eligibility Order stating that the City was eligible to be a debtor under Chapter 9 of the Bankruptcy Code and (b) the Order for Relief entitling the City to proceed with the Bankruptcy Case.

The City’s bankruptcy attorneys, Bankruptcy Court, State of Michigan, DIA, and certain charitable foundations collaborated to create the “Grand Bargain”. Judge Rosen, a mediator in the bankruptcy, came up with the “Grand Bargain” plan to save the artwork and the DIA. The Bankruptcy Court described the Grand Bargain, as the “cornerstone” of the Plan [Plan of Adjustment]. The collection of settlements comprising the Grand Bargain provided for the contribution of a total of $816 million spread over 20 years by the State, certain charitable foundations and the DIA for the benefit of the City’s pensioners while simultaneously protecting the City’s art collection at the DIA. It encouraged the largest creditor group, the City employees and retirees, to settle with the City.

Judge Rhodes wrote in his confirmation opinion of the City’s plan of adjustment:[41]

“The evidence unequivocally establishes that the DIA stands at the center of the City as an invaluable beacon of culture, education for both children and adults, personal journey, creative outlet, family experience, worldwide visitor attraction, civic pride and energy, neighborhood and community cohesion, regional cooperation, social service, and economic development. Every great City in the world actively pursues these values. They are the values that Detroit must pursue to uplift, inspire and enrich its residents and its visitors. They are also the values that Detroit must pursue to compete in the national and global economy to attract new residents, visitors and businesses. To sell the DIA art would only deepen Detroit’s fiscal, economic and social problems. To sell the DIA art would be to forfeit Detroit’s future. The City made the right decision.”

The region got off cheap in acquiring the DIA from the City like many of the other deals in the bankruptcy such as the acquisition of Belle Isle and the transfer of the Water and Sewer Systems to GLWA. The City and its residents never received the full value for these assets such as an exit from poverty.

On the Effective Date (December 10, 2014) of the City’s exit from bankruptcy, pursuant to the DIA Settlement set forth in the POA, the City irrevocably transferred all of its right, title and interest in the DIA assets to a perpetual charitable trust, including: (a) the DIA art collection; and (b) the real property located at 5200 Woodward Avenue, Detroit, Michigan (the site of the DIA); and associated parking lots and garages.

In filing for bankruptcy, the Governor was permitted to place contingencies on a local government in order to proceed under Chapter 9. However, the governor’s authorization letter stated, “I am choosing not to impose any such contingencies today. Federal law already contains the most important contingency — a requirement that the plan [Plan of Adjustment] be legally executable…” Accordingly, his authorization did not include a condition prohibiting the City from seeking to impair pensions in a bankruptcy.[42]

The State’s Constitution makes the accrued financial benefits of each State and local pension plan a contractual obligation of the State or its subdivisions. The State and local units are prohibited from diminishing or impairing these accrued benefits. This provision was designed to give the employee a vested right in his earned pension benefits.[43]

Michigan’s Attorney General Bill Schuette issued a statement in August 2013 that a bankruptcy filing does not relieve the City and its EM of their obligation to follow Michigan’s Constitution. And that restriction includes the constitutional provision that prohibits a political subdivision like Detroit from diminishing or impairing an accrued financial benefit of a pension plan or retirement system.[44]

Schuette wrote:

“Under Michigan law, there is no such accommodation when it comes to the accrued financial benefits of a public pension plan or retirement system. The constitutional protection is absolute. So the City can no more authorize a plan that reduces accrued obligations to public pensions than a plan that discriminates on the basis of religion. Accordingly, while the City has the ability to address health benefits or unaccrued pension benefits (neither of which Michigan’s Constitution specifically protects), vested pension benefits are inviolate.

The Michigan Legislature cannot enact laws that authorize local governments to violate the Michigan Constitution, and the Legislature’s enactment of Public Act 436 — specifically the bankruptcy authorization in § 18(1), Mich. Comp. Laws § 141.1558(1) — must thus be construed according to this basic legal principle. This means that when the Legislature enacted Public Act 436 and empowered the City and its emergency manager to pursue bankruptcy, the City and the manager’s actions in proposing a reorganization plan remain subject to applicable Michigan law, including article IX, § 24 of Michigan’s Constitution.

…Article IX, § 24 unambiguously prevents public officials from diminishing vested public-employee pension rights: The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. This provision prohibits the State, its officers, and any of its political units, including the City and its officers, from diminishing or impairing the pension benefits currently being received by retired City pensioners.

…Moreover, it is plain that the Michigan Legislature was aware of this constitutional provision when it enacted Public Act 436 because the Act requires EMs appointed under the act to “fully comply with . . . section 24 of article IX of the state constitution of 1963,” in the event an emergency manager becomes the trustee for a local unit’s pension fund.

…Delegate Richard VanDusen, one of the chief drafters of § 24, explained that accrued financial benefits were a kind of “deferred compensation”:

Now, it is the belief of the committee that the benefits of the pension plans are in the same deferred compensation for work performed. And with respect to work performed, it is the opinion of the committee that the public employee should have a contractual right to benefits of the pension plan, which should not be diminished by the employing unit after the service has been performed.”[45]

Columnist Jack Lessenberry found the history and intent of the State constitution’s protection of public pensions and wrote:

“When Judge Rhodes ruled that pensions could be cut, what he was really saying is that federal bankruptcy law allows him to do this — and this is superior to the state constitution.

Senator Jack Faxon worked on the State Constitution and the clause protecting pensions. Ironically, Faxon was best remembered as a longtime champion of the arts. Faxon founded the International School in Farmington Hills in 1968. Before he began a 30-year-career in the Michigan legislature, he was a young teacher in the Detroit Public Schools. In 1961, he got elected a delegate to the Constitutional Convention — at 25, the youngest one.

The head of the Detroit teachers’ retirement system came to Faxon and said he thought the constitution should protect all public service pensions. That made sense to Faxon, but he knew he wasn’t a lawyer. So he drafted something, and took it to a political science professor at Wayne State University. Next, Faxon took it to two senior attorneys, one of whom later became a federal judge. They all agreed it was fine, and airtight. Faxon then took it to his committee.

He was a Democrat; two-thirds of the delegates to the Constitution Convention were Republican. But there was no disagreement. “Getting people to agree that pensions should be protected was like getting them to agree than Sunday is Sunday,” Faxon said. But might those who, wrote the constitution have thought it might be permissible to short people on their pensions if the entity that promised them was bankrupt, like Detroit? “Absolutely not” Faxon said.[46] It was not the intent of the State constitution to allow a bankruptcy to be filed by the State that would impair City pensions.”

Judge Rhodes acknowledged that the State’s Constitution was intended to protect Detroit’s pension plans from impairment in in his confirmation of the City’s POA in November 2014. He wrote:

“The Plan’s differential treatment of Pension Claims is further justified because the fulfillment of the City municipal service mission is informed by, and subject to, the provisions of the constitution and laws of the State of Michigan and the City’s status as an agency of the State. Article IX, Section 24 of the Michigan Constitution (the “Pensions Clause”) (a) singles out municipal pension claims for special protection and (b) in so doing, specifically expresses the considered judgment of the people of the State of Michigan, which is entitled to substantial deference in connection with determining the fairness of the Plan’s discrimination against the Impaired Rejecting Classes.[47]

The reasonable expectations of creditors further demonstrate that the Plan’s treatment of Pension Claims is fair, because the Pensions Clause gives notice to all of the City’s unsecured creditors that, outside of bankruptcy, the rights of pension creditors are distinct and entitled to special State-law protections that are unavailable to other unsecured creditors of the City. Such constitutional notice (a) reasonably justifies the enhanced expectations of Holders of Pension Claims in this Chapter 9 Case and (b) should lower the reasonable expectations of all other unsecured creditors.”

Unlike private employees, public employees were not covered by ERISA or the Pension Benefit Guaranty Corporation. And the Detroit Police and Fire Department retirees were not covered by Social Security. For these retirees, there was no federal insurance program. Many City retirees depended on their pension benefits as there only source of income.[48]

The Federal government took over and paid Washington D.C.’s pension obligations when it had financial difficulties. In his deposition in the bankruptcy confirmation John Hill, former Executive Director of the DC Control Board, said:

“…The federal government took over the District’s unfunded pension liability as well, which meant that the District would not have to pay those pension costs that would have come due on the pension plan.”[49]

I believe the State should have assumed the City’s unfunded pension liabilities like the Federal government did for Washington D.C. Governor Snyder violated the law (State Constitution) by allowing the City of Detroit pensions to be reduced in bankruptcy. The State had a valid obligation per the State’s Constitution to pay Detroit’s pension obligations if the City could not. Considering that the State contributed to Detroit’s financial demise by cutting State revenue sharing it had even more responsibility for honoring Detroit’s pension obligation. Furthermore, the policies of the State and Federal government concentrated poverty in the City of Detroit and other City’s such as Pontiac and Highland Park that caused financial difficulty for the local government. Forcing an impoverished City into bankruptcy so that the State can avoid paying the pension obligations is in violation of the State’s Constitution.

Snyder, as Governor, took an oath to uphold the State’s constitution. The Constitution represents the will of the people. Snyder went against the will of the people several times as Governor. The people voted down the emergency manager law, Public Act 4. However, Snyder and State lawmakers passed Public Act 436, which gave emergency managers the power to recommend bankruptcy filings for local governments. Adding insult to injury they made the new law referendum proof by adding State funding to it. The voters couldn’t repeal this new law.

Judge Rhodes ruled that the Bankruptcy Court did have the authority to determine the constitutionality of Chapter 9 under the United States Constitution and the constitutionality of P.A. 436 under the Michigan Constitution. The Court recognized that the State of Michigan could not legally provide for the adjustment of the pension debts of the City of Detroit. This was a direct result of the prohibition against the State of Michigan impairing contracts in both the United States Constitution and Michigan Constitution, as well as the prohibition against impairing the contractual obligations relating to accrued pension benefits in the Michigan Constitution.[50] A contractual obligation could only be legally broken in a bankruptcy. He essentially ruled that the Michigan Constitution Pensions clause provided no greater protection for pension benefits than that afforded to ordinary contracts.[51]

Rhodes stated:

“The Bankruptcy Clause necessarily authorizes Congress to make laws that would impair contracts. It long has been understood that bankruptcy law entails impairment of contracts. …The state constitutional provisions prohibiting the impairment of contracts and pensions impose no constraint on the bankruptcy process. The Bankruptcy Clause of the United States Constitution, and the bankruptcy code enacted pursuant thereto, explicitly empower the Bankruptcy Court to impair contracts and to impair contractual rights relating to accrued vested pension benefits. Impairing contracts is what the bankruptcy process does.”[52]

Rhodes concluded that under the Michigan Constitution, pension rights are contractual rights, they are subject to impairment in a federal bankruptcy proceeding. This was probably one of the most significant rulings of the bankruptcy. Prior to this it was questionable whether a court could impair pension benefits in a Chapter 9 bankruptcy when a State constitution protected public pensions. Rhodes was saying Federal law always prevails over State law.[53]

Pension and healthcare obligations of the City’s retirees accounted for about 85 percent of all unsecured claims in the bankruptcy.[54] Judge Rhodes decision that pensions could be impaired in bankruptcy ensured that Detroit’s retirees and employees would agree to pension concessions offered to them for fear of losing more if cuts were forced on them. It was a brilliant strategic move. It facilitated the bankruptcy and encouraged other creditors to settle quickly. It resulted in a relatively speedy conclusion to Detroit’s bankruptcy. It is doubtful that the City’s retirees and employees would have agreed to the pension cuts if they believed that the State’s Constitution protected them in bankruptcy. [55]

Snyder and the State were wrong to allow Detroit under Public Act 436 to file for bankruptcy and impair City pensions. This was a violation of the State’s Constitution. Rhodes noted in his opinion regarding the City’s eligibility for bankruptcy that there certainly was some credible evidence in support of the Retired Detroit Police Members Association’s (RDPMA) assertion that the appropriations provisions in Public Act 436 were motivated by a desire to immunize it from referendum. Howard Ryan testified in his deposition on October 14, 2013, and acknowledged that one or more of the reasons to put the appropriation language in there was to make sure that the new act could not be defeated by a referendum. He also acknowledged the Governor’s office knew that that was the point of it and that the legislators he dealt with knew that that was the point of it.[56]

Other evidence in support includes: a January 31, 2013, e-mail addressed from Kevyn Orr to partners at Jones Day, in which he observed that P.A. 436 “is a clear end-around the prior initiative” to repeal the previous Emergency Manager statute, Public Act 4, “that was rejected by the voters in November.” According to Orr “although the new law provides the thin veneer of a revision it is essentially a redo of the prior rejected law and appears to merely adopt the conditions necessary for a chapter 9 filing.” [57]

Judge Rhodes concluded that P.A. 436 was not a violation of the pension clause of the Michigan Constitution. I don’t know if its semantics because Rhodes didn’t provide much support for his conclusion, but maybe the law in itself wasn’t a violation. However, using the law to put the City into bankruptcy for the purpose of impairing Detroit’s retiree’s pensions was a clear violation of the State’s Constitution’s Pension clause.

In denying the Declaratory Judgment, Webster v. State of Michigan, Judge Rhodes wrote:

“There is a fundamental reason to deny the declaratory judgment any preclusive effect in this bankruptcy case. Upon the City’s bankruptcy filing, federal law — specifically, 28 U.S.C. § 1334(a) — gave this Court exclusive jurisdiction to determine all issues relating to the City’s eligibility to be a chapter 9 debtor. That provision states, “[T]he district courts shall have original and exclusive jurisdiction of all cases under title 11.” 28 U.S.C. § 1334(a).

The wisdom of this grant of exclusive jurisdiction lies in the absolute necessity that any bankruptcy petition be filed, considered, and adjudicated in one court. Foreclosing the opportunity for parties to litigate a bankruptcy petition in multiple courts eliminates the likely consequence of a confused and chaotic race to judgment, and of the associated multiplication of expenses. It also eliminates the potential for inconsistent outcomes.

…The Court therefore concludes that upon the filing of this case at 4:06 p.m. on July 18, 2013, the Ingham County Circuit Court lost the jurisdiction to enter any order or to determine any issue pertaining to the City’s eligibility to be a chapter 9 debtor.

The Court concludes that in light of its conclusions that the state court lacked jurisdiction and that its judgment is void, it is unnecessary to decide these issues.”

Apparently Judge Rhodes concluded that since he had jurisdiction, possession was 9/10th of the law. Despite the violation of the State Constitution’s pension clause, he justified the impairment of the City’s pensions because he could in bankruptcy because he had jurisdiction. The ball was in his court, and he could do with it what he wanted. His court had the right to break contracts that the State couldn’t, and he construed the pensions to be contractual obligations. The end justified the means.

The Detroit News in an article on the City’s bankruptcy and “Grand Bargain” dated November 13, 2014, described the action going on behind the “Grand Bargain”. What I learned from the article was:

“Judge Rosen was crafting the “Grand Bargain” in August 2013 and mediating it before Judge Rhodes announced his decision on December 3, 2013 that the City’s pensions could be impaired in bankruptcy. [58]

Judge Rosen and Governor Snyder knew each other for a long time. As a student at the University of Michigan, Snyder worked as a volunteer on Rosen’s unsuccessful bid for Congress in 1982. They talked frequently, seldom more so than in the months before the Grand Bargain became a possibility.

“Following its own financial and legal analysis, the governor’s team raised the possibility that the state may be on the hook for all of Detroit’s unfunded pension liability — a disputed number that ranged from $1 billion to $3.5 billion, 10 times the $350 million [State Contribution per the “Grand Bargain”] proposed by Rosen.”

“It won’t be easy, said state Sen. Roger Kahn, the Saginaw County Republican who chairs the Senate Appropriations Committee. ‘Don’t you think that’s a Hail Mary?’ he said, adding a note of sarcasm: ‘There aren’t a hell of a lot of moderates out there who are willing to send money down to the evil people of Detroit. That’s just the way it is.’”

On Jan. 22, 2014, the governor and the Republican leadership announced the State would commit $350 million in taxpayer money over 20 years to ease pension cuts proposed by Orr and his bankruptcy team. For the $350 million the State got an agreement from the City retirees that they would not sue the State for any additional funding of the pension plans even though they were liable under the State constitution. Essentially the State avoided a potential $3 billion liability with the $350 million contribution to the Grand Bargain.

“The next afternoon, the governor waited to board Delta flight 2062 to Washington — a plane that would carry Gargaro, too. On Jan. 24, Snyder would receive an Americans for the Arts Award at a U.S. Conference of Mayors meeting; the DIA chairman would be sitting at Snyder’s table, at the request of the governor’s office.” [59]

The Judge acknowledged in his confirmation of the City’s POA that the Michigan Constitution can be read to support the pension claim. On litigation of the pension claims, Rhodes said, “If the state loses, it would be responsible for the Detroit pension underfunding of $3 billion. It might also then be responsible for the entire unfunded liability of every municipality in the state. That would be disastrous for the state.” [60]

In settlement of the pension claim by the City’s retirees and employees against the State valued at $3 billion, the State paid $194.8 million (the present value of the $350 million agreed to in the Grand Bargain). The State got off cheap.

What I learned about bankruptcy is that there is no fair treatment. The Judge determined certain creditors such as retirees were more vulnerable than other creditors. Rhodes could dictate what was fair.[61]

I believe if Rhodes went by the letter of the law, he would not have been able to authorize the bankruptcy. He would have thrown the bankruptcy back to Governor Snyder and told the State to pay for Detroit’s pension obligations.

Rhodes judged that requiring the State to pay its financially distressed local governments’ pension obligations would be too costly and possibly overwhelm the entire State tax base. It was more prudent and beneficial to subject the relatively small number of Detroit employees and retirees to losing a portion of their benefits. As a result, a minority suffered so that the majority could avoid their obligations.

Judge Rhodes in his opinion regarding the City’s eligibility to file for bankruptcy addressed the conspiracy and unethical actions of the EM, Governor and the bankruptcy consultants regarding Detroit.[62] Rhodes wrote:

“According to this composite narrative of the lead-up to the City of Detroit’s bankruptcy filing on July 18, 2013, the bankruptcy was the intended consequence of a years-long, strategic plan. The goal of this plan was the impairment of pension rights through a bankruptcy filing by the City. Its genesis was hatched in a law review article that two Jones Day attorneys wrote. This is significant because Jones Day later became not only the City’s attorneys in the case but is also the law firm from which the City’s emergency manager was hired. The article is Jeffrey B. Ellman; Daniel J. Merrett, Pensions and Chapter 9: Can Municipalities Use Bankruptcy to Solve Their Pension Woes? 27 EMORY BANKR. DEV. J. 365 (2011). It laid out in detail the legal roadmap for using bankruptcy to impair municipal pensions. The plan was executed by the top officials of the State of Michigan, including Governor Snyder and others in his administration, assisted by the state’s legal and financial consultants — the Jones Day law firm and the Miller Buckfire investment banking firm. The goals of the plan also included lining the professionals’ pockets while extending the power of state government at the expense of the people of Detroit. Always conscious of the hard-fought and continuing struggle to obtain equal voting rights in this country and an equal opportunity to partake of the country’s abundance, some who hold to this narrative also suspect a racial element to the plan.

The plan foresaw the rejection of P.A. 4 coming in the November 2012 election, and so work began on P.A. 436 beforehand. As a result, it only took 14 days to enact it after it was introduced in the legislature’s post-election, lame duck session.

It was also enacted in derogation of the will of the people of Michigan as just expressed in their rejection of P.A. 4.

The plan also included inserting into P.A. 436 two very minor appropriations provisions so that the law would not be subject to the people’s right of referendum and would not risk the same fate as P.A. 4 had just experienced. The plan also called for P.A. 436 to be drafted so that the Detroit emergency manager would be in office under the revived P.A. 72 on the effective date of P.A. 436. This was done so that he would continue in office under P.A. 436, M.C.L. § 141.1572, and no consideration could be given to the other options that P.A. 436 appeared to offer for resolving municipal financial crises.

…The plan also saw the value in enticing a bankruptcy attorney to become the emergency manager, even though he did not have the qualifications required by P.A. 436. M.C.L. § 141.1549(3)(a).

Another important part of the plan was for the state government to starve the City of cash by reducing its revenue sharing, by refusing to pay the City millions of promised dollars, and by imposing on the City the heavy financial burden of expensive professionals.

The plan also included suppressing information about the value of the City’s assets and refusing to investigate the value of its assets — the art at the Detroit Institute of the Arts; Belle Isle; City Airport; the Detroit Zoo; the Department of Water and Sewerage; the Detroit Windsor Tunnel; parking operations; Joe Louis Arena, and City-owned land.

…As the bankruptcy filing approached, a necessary part of the plan became to engage with the creditors only the minimum necessary so that the City could later assert in Bankruptcy Court that it attempted to negotiate in good faith. The plan, however, was not to engage in meaningful pre-petition negotiations with the creditors because successful negotiations might thwart the plan to file bankruptcy.

…The penultimate moment that represented the successful culmination of the plan was the bankruptcy filing. It was accomplished in secrecy and a day before the planned date, in order to thwart the creditors who were, at that very moment, in a state court pursuing their available state law remedies to protect their constitutional pension rights. “In the dark of the night” was the phrase used to describe the actual timing of the filing. The phrase refers to the secrecy surrounding the filing and is also intended to capture in shorthand the assertion that the petition was filed to avoid an imminent adverse ruling in state court.

Another oft-repeated phrase that was important to the objectors’ theory of the City’s bad faith was “foregone conclusion.” This was used in the assertion that Detroit’s bankruptcy case was a “foregone conclusion,” as early as January 2013, perhaps even earlier.[63]

The testimony of Howard Ryan, the legislative assistant for the Michigan Department of Treasury who shepherded P.A. 436 through the legislative process. He testified that the appropriations provisions in P.A. 436 were inserted to eliminate the possibility of a referendum vote on the law, and everyone knew that. A January 31, 2013, email from Mr. Orr to fellow Jones Day attorneys, stating, “By contrast Michigan’s new EM law is a clear end-around the prior initiative that was rejected by the voters in November…. The news reports state that opponents of the prior law are already lining up to challenge this law. Nonetheless, I’m going to speak with Baird in a few minutes to see what his thinking is. I’ll let you know how it turns out. Thanks.”

Exhibit 402 also contains an email dated January 31, 2013, from Dan T. Moss at Jones Day to Mr. Orr, which states:

Making this a national issue is not a bad idea. It provides political cover for the state politicians. Indeed, this gives them an even greater incentive to do this right because, if it succeeds, there will be more than enough patronage to allow either Bing or Snyder to look for higher callings whether Cabinet, Senate, or corporate. Further, this would give you cover and options on the back end.

The State’s selection of a distinguished bankruptcy lawyer to be the emergency manager for Detroit. (Discussing how Mr. Orr came with the Law Firm in late January to pitch for the City’s restructuring work before a “restructuring team [of] advisors”); during that pitch, Mr. Orr (among other lawyers that would be working on the proposed engagement) was presented primarily as a “bankruptcy and restructuring attorney.” (Indicating that Baird explained to Mayor Bing that Baird was “impressed with him [Mr. Orr], that he had been part of the bankruptcy team representing Chrysler” and that Mr. Orr primarily had restructuring experience in the context of bankruptcy).

Jones Day provided 1,000 hours of service without charge to the City or the State to position itself for this retention. (Email dated January 28, 2013, from Corinne Ball to Jeffrey Ellman, both of Jones Day, stating: “Just heard from Buckfire. Strong advice not to mention 1000 hours except to say we don’t have major learning curve”).

Exhibit 844 provides a list of memos that attorneys at Jones Day prepared prior to June 2012, “in connection with the Detroit matter.” Heather Lennox of Jones Day requested copies of these memos for a June 6, 2012, meeting with Ken Buckfire, of Miller Buckfire, and Governor Snyder. Some of the memos include:

(1) “Summary and Comparison of Public Act 4 and Chapter 9”

(2) “Memoranda on Constitutional Protections for Pension and OPEB Liabilities”

(3) “The ability of a city or state to force the decertification of a public union”

(4) “The sources of, and the ability of the State to withdraw, the City’s municipal budgetary authority.”

(5) “Analysis of filing requirements of section 109(c)(5) of the Bankruptcy Code (“Negotiation is Impracticable” and “Negotiated in Good Faith”)

Exhibit 846, an email dated March 2, 2012, from Jeffrey Ellman to Corinne Ball, both of Jones Day, with two other Jones Day attorneys copied. The subject line is, “Consent Agreement,” and the body of the email states: We spoke to a person from Andy’s office and a lawyer to get their thoughts on some of the issues. I thought MB was also going to try to follow up with Andy directly about the process for getting this to the Governor, but I am not sure if that happened.

The cleanest way to do all of this probably is new legislation that establishes the board and its powers, AND includes an appropriation for a state institution. If an appropriation is attached to (included in) the statute to fund a state institution (which is broadly defined), then the statute is not subject to repeal by the referendum process.

Tom is revisiting the document and should have a new version shortly, with the idea of getting this to at least M[iller]B[uckfire]/Huron [Consulting] by lunchtime.

Exhibits 201 & 202, showing that Jones Day and Miller Buckfire consulted with state officials on the drafting of the failed consent agreement with the City. They continued to work on a “proposed new statute to replace Public Act 4” thereafter.

The testimony of Donald Taylor, President of the Retired Detroit Police and Fire Fighters Association. He testified about a meeting that he had with Mr. Orr on April 18, 2013: “I asked him if he was — about the pensions of retirees. He said that he was fully aware that the pensions were protected by the state Constitution, and he had no intention of trying to modify or set aside . . . or change the state Constitution.”

At the June 10, 2013 community meeting, Mr. Orr was asked a direct question — what is going to happen to the City employee’s pensions? Mr. Orr responded that pension rights are “sacrosanct” under the state constitution and state case law, misleadingly not stating that upon the City’s bankruptcy filing, his position would be quite the opposite. In response to another question about whether Mr. Orr had a “ball park estimation” of the City’s chances of avoiding bankruptcy, Mr. Orr responded that, as of June 10, there was a “50/50” chance that the City could avoid bankruptcy, knowing that in fact there was no chance of that.

State Treasurer Andy Dillon expressed concern that giving up too soon on negotiations made the filing “look premeditated”

The City allotted only thirty four days to negotiate with creditors after the June 14 Proposal to Creditors.”[64]

Rhodes wrote, “…The issue that this evidence presents is how to evaluate it in the context of the good faith requirement. For example, during the orchestrated lead-up to the filing, was the City of Detroit’s bankruptcy filing a “foregone conclusion” as the objecting parties assert? Of course it was, and for a long time.”

He noted that many of Detroit’s taxpayers were in a worse predicament than the current or retired workers. Property values in Detroit plummeted, unemployment was high, and many public services had virtually disappeared. The City needed relief from its debts and he was willing to overlook the deceit because the end justified the means.

The bankruptcy documents were originally dated July 19, 2013 including the EM order for the bankruptcy. The 19 was changed/overwritten with ink pen to 18. It looked like the plan was to file a day later. However, when it was learned that the City’s pension fund was trying to file a stay against the bankruptcy, the Jones Day lawyers made a race to the court house and beat them. The rest is history.

Rhodes set a no-nonsense tone for the case in the first two hearings on July 24 and Aug. 2, enforcing the automatic stay to shield the city from an onslaught of lawsuits. He set an aggressive trial timetable.

On September 30, 2013, the City and State of Michigan through its Department of Natural Resources (DNR), entered into a lease of the Belle Isle Park. The State would manage and operate Belle Isle Park as a State park subject to the rules and regulations of the DNR regarding State parks. No cash was being paid by the State; however, the management, operation and maintenance services provided by the DNR during the lease term was the consideration being provided to the City for the lease. It was expected that the lease would save the City approximately $6.0 million each fiscal year of the lease. The DNR would retain all revenue derived from management of the Park and would only use the revenue for the operation and improvement of the Park. The term of the lease was 30 years with two 15-year renewal periods.

On December 3, 2013, the Court found that the City did not negotiate in good faith with its creditors before the bankruptcy filing.[65] The Court found that negotiations were in impracticable, even if the City had attempted good faith negotiations. The impracticality requirement was satisfied based on the sheer number of creditors involved. The list of creditors for the City of Detroit was over 3,500 pages. It listed over 100,000 creditors.[66]

On December 5, 2013, the Bankruptcy Court entered (a) the Eligibility Order stating that the City was eligible to be a debtor under Chapter 9 of the Bankruptcy Code and (b) the Order for Relief entitling the City to proceed under Chapter 9.[67] Judge Rhodes wrote:

“The City is “service delivery insolvent.” Its services do not function properly due to inadequate funding. The City has an extraordinarily high crime rate; too many street lights do not function; EMS does not timely respond; the City’s parks are neglected and disappearing; and the equipment for police, EMS and fire services are outdated and inadequate.

Over 38% of the City’s revenues were consumed by servicing debt in 2012, and that figure is projected to increase to nearly 65% of the budget by 2017 if the debt is not restructured.

Without revitalization, revenues will continue to plummet as residents leave Detroit for municipalities with lower tax rates and acceptable services. Without the protection of chapter 9, the City will be forced to continue on the path that it was on until it filed this case. In order to free up cash for day-to-day operations, the City would continue to borrow money, defer capital investments, and shrink its workforce. This solution has proven unworkable. It is also dangerous for its residents. If the City were to continue to default on its financial obligations, as it would outside of bankruptcy, creditor lawsuits would further deplete the City’s resources. On the other hand, in seeking chapter 9 relief, the City not only reorganizes its debt and enhances City services, but it also creates an opportunity for investments in its revitalization efforts for the good of the residents of Detroit.”[68]

The City had an advantage in bankruptcy. Consultants Ernst & Young, Conway Mackenzie, and Jones Day had done much of the groundwork before the bankruptcy and were able to steamroll the process while the creditor attorneys were getting up to speed. It also helped to have the Miller Canfield law firm who had done much work with the City and had the experience over the creditor attorneys.

The Bankruptcy Court established a mediation program to facilitate the negotiation of restructuring issues. Judge Rhodes appointed Judge Gerald E. Rosen, Chief Judge for the United States District Court for the Eastern District of Michigan, as the lead mediator for the City’s Bankruptcy. In turn, Rosen appointed six additional mediators, each focusing on different elements of the City’s restructuring and reorganization activities. There were multiple mediation sessions arising in connection with the City’s general obligation debt; labor and pension matters; and matters related to the future of the DWSD.

The Bankruptcy Court set a deadline of March 1, 2014 for the City to file a plan of adjustment (POA). On February 21, 2014, the City filed its POA and a related disclosure statement. The POA and disclosure statement were further amended and modified.

The POA provided a framework to restructure the City’s long-term obligations so that the City could exit bankruptcy and return to fiscal stability. It provided for the adjustment of secured and unsecured debt and outlined proposed reinvestment initiatives. The POA proposed that unsecured non-retiree creditors with whom the City had not reached a settlement generally would receive approximately 10%-13% recovery on their claims. The POA also proposed for the City to invest approximately $1.4 billion over 10 years to, include: (1) comprehensively address and remediate residential urban blight, (2) improve the operating performance and infrastructure of its police, fire, EMS and transportation departments (among other departments), (3) modernize its information technology systems on a City-wide basis and (4) improve services at all levels to Detroit’s citizens.

The Hardest Hit Fund grant money from the federal government for demolitions to remediate the blight was not figured into the POA. It provided a big relief to the City’s budget after the bankruptcy exit.

The POA provided that the City would not seek to terminate the GRS or the PFRS, although their respective pension plans would be closed to new participants, and vested active employees would not continue to accrue additional pension benefits. The two plans were “frozen” on July 1, 2014. The City continued to retain the responsibility to fund all amounts necessary to provide the adjusted (reduced) pension benefits to its employees and retirees who had accrued benefits in either of the GRS or PFRS pension plans. The City’s contributions were fixed through the period ending June 30, 2023. Thereafter, the City was required to contribute all amounts necessary to fund the modified accrued pensions regardless of the actual future investment performance of the pension plan assets.

As part of the bankruptcy settlement offered to the City’s pension creditor classes, the parties agreed to an allowed aggregate UAAL (unfunded actuarial accrued liability) claim of $1.25 billion for the PFRS and $1.879 billion for the GRS. The pension claims in bankruptcy totaled $3.1 billion. The cuts to the pension funds in bankruptcy were estimated to total $1.3 billion. The Grand Bargain was to provide a total of $816 million. So the $3.1 billion claim would have been reduced by $2.1 billion to $1.0 billion. The settlement gave the city a ten-year holiday from making any significant contributions to the legacy pension systems.[69]

The pension classes voted to accept the POA by 82% in class 10 (PFRS) and 73% in class 11 (GRS).[70]

The POA provided for monthly GRS pension benefits to be reduced by 4.5% and Cost of Living Adjustments (COLA) were eliminated. Holders of GRS pension claims who participated in the Annuity Savings Fund during the period July 1, 2003 to June 30, 2013, also were subject to the recoupment by the City of excess interest credited to ASF’s accounts during that period.

The POA did not reduce monthly pension payments for holders of PFRS pension claims, but it did reduce annual cost-of-living adjustments (“COLAs” or “escalators”) by 55%.

According to a report produced by Kim Nicholl, an actuary who advised the Retirees’ Committee appointed by Judge Rhodes, the COLA cuts would reduce future payments to general retirees by about $616 million, and to police and firefighter retirees by some $688 million, for a total of more than $1.3 billion.[71] The average reduction in the present value of pensions for GRS retirees due solely to COLA was 16.2% of benefits, and in combination with the direct pension cuts, was 22.3% of benefits.[72] A retiree whose pension would have reached $35,500 after thirty years with COLA, would have a $20,000 pension after thirty years, assuming no partial restoration of COLA. The COLA elimination was the biggest loss for the City’s GRS retirees. In our later years it will put us in a bind, especially if inflation gets worse, which it currently (March 2022) is.

The recoupment of alleged interest overpayments into ASF accounts (“claw back”) was estimated to take more than $190 million from retirees who participated in the program from 2003 to 2013.[73] According to the Nicholl Report, approximately 68% of the GRS retirees (8,222) were not subject to ASF recoupment because they did not maintain or take a distribution from their individual annuity savings accounts after July 1, 2003.[74] I was also impacted by the ASF recoupment which took 20% of my annuity (approximately $50,000) plus 6.75% in interest per year from my pension for the rest of my life. With interest the recoupment from my pension would total over $80,000.

The ASF recoupment was unfair and discriminatory. It singled out a small group, especially active employees. Older retirees were not subject to the clawback. Yet all were grouped in the same class 11 for the bankruptcy. It was estimated that 68% of the class 11 members were not affected by the ASF recoupment. The class 11 accepted the settlement by a vote of 73%.[75] It was in their interests to vote for the plan and apparently, they did.

The bankruptcy spin made it look like the City’s retirees were favored and got a great deal. We really didn’t. I lost my retiree health care and a substantial amount of my pension and annuity. There was no insurance to pay off on my losses like much of the City’s other debt that was reduced in bankruptcy.

The retiree health care settlement was actually the most favorable settlement the City achieved in the bankruptcy. The POA allowed the City to eliminate billions in unfunded retiree health obligations through the creation of two voluntary employee beneficiary associations (or VEBAs). The VEBAs provide health care, life and other benefits to beneficiaries and certain of their dependents. The “Detroit Police and Fire VEBA” was established for retired police and fire uniform employees and the “Detroit General VEBA” was established for the retirees in the General Retirement System.

A total of $492.7 million (2014 B(1) and B(2) bonds issued on December 10, 2014, plus an additional amount of approximately $5.0 million (paid over time) from private foundations, were used to fund the VEBAs. The “Detroit Police and Fire VEBA” and the “Detroit General VEBA” received $253.9 million and $238.8 million of the bonds, respectively.

From and after January 1, 2015, the City had no further responsibility to provide retiree health care or any other retiree welfare benefits to City employees who retired prior to that date. The two VEBA trusts, were responsible for the funding of retiree health coverage benefits on and after January 1, 2015.

The VEBAs were funded with unsecured bonds issued by a bankrupt City that initially had a market value of 40% of their par value. The VEBAs couldn’t sell the bonds to raise revenue. They had to depend on the interest from the debt service which was paid twice a year. In addition, the principal payments were delayed until 2024. There wasn’t much available for retirees for their health care from the VEBAs. The estimated recovery for the City retirees and employees for retiree health care was 10% of their claims. Unlike the retirees’ pension claims, their OPEB claims had no State constitutional protection.

The City issued $120.0 million of State of Michigan Financial Recovery bonds on April 8, 2014. The proceeds were used to enhance City services to improve the quality of life of the City’s citizens. Uses included public safety improvements including purchasing new police cars, hiring new police officers, upgrading technology and equipment, and blight removal.

On April 9, 2014, the City and three bond insurers agreed to a settlement regarding the unlimited tax general obligation bonds (UTGO) that they insured, which UTGO bonds had a total principal value of $330.9 million at June 30, 2014. Pursuant to the settlement, holders of UTGO bonds received a pro-rata share of Restructured UTGO Bonds in the principal amount of $279.6 million (2014 A1-K1 Bonds issued December 10, 2014). The insurers of the prior UTGO bonds received $7.9 million of the Restructured UTGO Bonds.

The City’s POA provided that the proceeds of ad valorem taxes pledged and collected to pay the remaining principal and related interest of the original UTGO bonds — which would remain outstanding and not be exchanged for new bonds — would be assigned by the POA to support the City’s two pension plans primarily for additional distributions to those retirees who meet certain income eligibility criteria.

The City, the LTGO (Limited Tax General Obligation) bond insurer and Black Rock Financial Management reached a settlement related to the treatment of allowed LTGO Bond Claims. On December 10, 2014, in accordance with the POA, the City eliminated $161.0 million of Limited Tax General Obligation Bonds and paid to the holders of allowed LTGO Bond Claims $55.0 million in cash from the General Fund. Holders of allowed LTGO Bond Claims also received $17.3 million of the 2014 B(1) and B(2) Bonds issued by the City on that day.

On July 21, 2014, Kurtzman Carson Consultants LLC filed a declaration regarding the results of creditor voting with respect to, the fourth amended POA. Those impaired classes that voted to accept the POA included the PFRS pension claims, GRS pension claims, OPEB claims, POC Swap claims and Unlimited Tax General Obligation Bond claims. Those impaired classes that voted to reject the POA included the POC claims (Syncora and FGIC) and certain classes of DWSD debt.

On September 9, 2014, as a result of the mediation in bankruptcy, the EM, the Mayor, the County Executives of Wayne, Oakland and Macomb Counties and the Governor executed a Memorandum of Understanding (MOU) detailing the framework and parameters for establishing a regional authority, to be called the Great Lakes Water Authority (GLWA), to operate and manage the regional assets of the Detroit Water Supply System and Sewage Disposal System (“Detroit Systems”) owned by the City of Detroit.

The Articles of Incorporation of the GLWA and MOU included the following:

· The City retains control and ownership of the Detroit Systems.

· The City leased the Detroit Systems (except the Detroit local system infrastructure) to GLWA for an initial term of 40 years, extendable to at least match the term of any outstanding bonds of the Authority.

· Consideration for the Lease was a $50 million payment from the GLWA per year to be held by the GLWA and used at only for the following: Detroit local system infrastructure improvements, debt service associated with such improvements or the City’s share of the cost of common-to-all improvements. The City was forbidden to use the payment to support the General Fund.

· The existing recognitions of the City’s ownership and system support in the Water and Sewer System rate structures (return on equity for water and per settlement for sewer) were frozen and continued at $26.2 million per year ($20.7 million for the Water System and $5.5 million for the Sewer System) during the term of the GLWA.

· Each Detroit System was assumed to experience revenue requirement increases of not more than 4% for each of the first 10 years under the GLWA management.

Under mediation by the two Federal Judges, Sean Cox and David Lawson, Mayor Duggan abandoned Orr’s strategy to press Wayne, Oakland and Macomb counties to pay through GLWA a $50 million a year lease payment into the City’s General Fund. Instead, he pushed a plan that would include a $50 million lease payment with the restrictions, as noted above.[76] The City could have used the extra $50 million in the General Fund.

Syncora owned and was an insurer of $351.9 million of the City’s POC debt. In addition, Syncora insured certain interest rate swap agreements and UTGO debt ($34.4 million). The Syncora Settlement per the POA: (1) extended and amended Syncora’s lease for the Detroit Windsor Tunnel for an additional 20 years to December 2040; (2) created the Syncora Development Agreement and the Syncora Option Agreement; and (3) the City paid $5 million (on December 10, 2014) to Syncora in full satisfaction of all of Claims filed or asserted against the City by Syncora relating to the POC Swap Agreements.

In accordance with the Syncora Development Agreement, Syncora was granted options to acquire certain properties owned by the City including the former Police Headquarters located at 1300 Beaubien. The Syncora Option Agreement included a one-year option, exercisable from the effective date of the POA for Syncora to enter into a 30 year concession with respect to the parking garage located under Grand Circus Park.

The City paid cash, issued bonds, and gave options and credits totaling $82.6 million in settlement of all Syncora’s claims against the City per the POA.

The Financial Guaranty Insurance Company (“FGIC”) was an insurer of $1.1 billion of the City’s POC debt. The FGIC settlement per the POA: (1) created the FGIC Development Agreement; and (2) FGIC received an Allowed Class 14 Claim in the amount of $6.15 million and the DDA assigned to FGIC all of its right, title, and interest to the 2014 B (1) Bonds distributed to the DDA.

FGIC and the City entered into a development agreement for the Joe Louis Arena site. Under this agreement, an entity to be formed and controlled by FGIC had the option to acquire and develop the land upon which the Joe Louis Arena and its garage sat. The City was to demolish the structures on the land and perform any necessary environmental remediation pursuant to the terms of the development agreement.

The City paid cash, issued bonds, and gave options and credits totaling $164.0 million in settlement of all FGIC’s claims against the City per the POA.

Most of the City’s bonds and the POCs were insured. As a result, when the City defaulted on the bond payments most of the bond holders were still paid. It was the insurers who mainly suffered the loss.[77] Insurers take risks. They are responsible to pay the debt service when the debtors default. Unlike most of the bond holders the retirees had no protections and took the full brunt of the losses in bankruptcy.

Michigan Public Act 181 of 2014 established the Detroit Financial Review Commission (FRC), to monitor the City’s compliance with the POA and provide oversight of the City’s financial activities.

The hearing on confirmation of the POA lasted 24 days between September 2, 2014 and October 27, 2014. On November 12, 2014, the Bankruptcy Court entered an order confirming the POA (the “Confirmation Order”).

On September 25, 2014, the City Council voted unanimously to remove the EM as of the effective date of the POA. By a letter to the Governor, the Mayor approved of the City Council’s vote on the same day. On September 25, 2014, the EM restored the authority of the Mayor and the City Council over day-to-day operations and activities effective immediately as permitted by State law. The EM continued to exercise his powers for the management of the bankruptcy proceedings and the implementation of the POA until the City’s exit from bankruptcy on December 10, 2014.

On December 9, 2014, Governor Snyder determined that the financial condition of the City would be corrected in a sustainable fashion so as to justify removing the City from receivership. On December 9, 2014, the Governor approved the termination of: (a) the City’s financial emergency status and; (b) the EM’s contract. The Governor in his “Notice of Termination” letter to the EM dated December 9, 2014 stated:

“When I authorized the placement of the City into bankruptcy, I noted that at that point, the City could not meet its basic obligation to its citizens, which had also resulted in an inability to meet obligations to its creditors. The bankruptcy process, combined with the budget that is now in place, means the financial emergency will be sustainably rectified.” Furthermore, the Governor stated: “I conclude that the financial conditions of the City have been corrected in a sustainable fashion as provided in Act 436. Therefore, pursuant to Section 9(7) of the Act, I hereby remove the City of Detroit from receivership as of the Effective Date of the Plan for Adjustment, provided that this occurs prior to December 31, 2014, and do so without the imposition of any conditions permitted under the Act.”

On December 10, 2014 (the “Effective Date”), the transactions contemplated by the POA closed, and the POA became effective pursuant to its terms. On that date the EM resigned, thereby fully restoring day-to-day management of the City to the Mayor and City Council. Also, on that date the FRC became operational and began its oversight responsibilities.

Judge Rhodes confirmation order of the City’s POA on November 7, 2014 was very detailed and gives the best summary of Detroit’s bankruptcy. Detailed below are the highlights of the Judge’s order.

“The purpose of the Plan is to adjust the City’s debts to enable the City to reverse its decades-long financial decline, eliminate its service delivery insolvency, restore adequate municipal services to its residents and meet its future financial obligations, consistent with the overarching remedial purpose of chapter 9 and the objectives and purposes of the Bankruptcy Code. The City’s good faith in proposing the Plan and its prior versions, and fundamental fairness in dealing with its creditors, is further evidenced by the fact that the Plan (a) incorporates multiple key settlements that are the result of extensive arm’s length negotiations (often conducted within the context of Court-ordered mediation) between the City and representatives of a large proportion of its creditors, (b) has been proposed with the support of the City’s largest creditor constituencies and © is feasible. In so finding, the Court has considered the totality of the circumstances in this Chapter 9 Case.”[78]

Rhodes said the cornerstone of the plan was the Grand Bargain. The settlements represented in the Grand Bargain are the pension settlement, the state contribution agreement, and the DIA settlement. The State of Michigan, a number of charitable foundations, the Detroit Institute of Arts and a number of individuals will contribute to the City’s two pension plans a total value of $816 million over 20 years.[79]

Rhodes determined that the pension settlement was a reasonable settlement. The pension claimants class voted to approve the POA and the reduction of pension benefits. Many pension claimants opposed the impairment of pensions in the bankruptcy. They believed that under the Michigan constitution, their pension rights were not subject to impairment. Some appealed the Court’s decision. The Judge overruled the objections to the pension settlement

Rhodes said concerning the pension settlement, “It borders on the miraculous. No one could have foreseen this result for the pension creditors when the City filed this case. The plan’s proposal is only possible because of the pension settlement and the Grand Bargain. The pension reductions in the pension settlement are minor compared to any reasonably foreseeable outcome for these creditors without the pension settlement and the Grand Bargain. At the same time, the Court must acknowledge that these pension reductions will cause real hardship. In some cases, it is severe. This bankruptcy, however, like most, is all about the shared sacrifice that is necessary because the City is insolvent and desperately needs to fix its future. All of the City’s unsecured creditors are making sacrifices.”

On the recoupment of the ASF excess earnings Rhodes wrote, “For many years, the GRS credited interest in each participant’s ASF account at the assumed rate of return even when the actual rate of return was less than that. The City claims that this diversion of assets increased the GRS unfunded liability. It claims that it is therefore entitled to recoupment of the excess interest credits from the participants to offset that increased unfunded liability. This in turn would reduce the pension cuts to the GRS retirees. The City calculates that the total of this claim is approximately $387 million. The GRS and the ASF participants assert that there is no basis for recoupment.… The settlement will net approximately $190 million for the GRS, which is about 49% of the City’s calculation of its claim.”

Rhodes said, “The Court found here today that the state’s contribution of $195 million in exchange for a release of liability on the pensioner’s constitutional claim is a reasonable settlement. History will judge the correctness of this finding, and it will judge that this finding was correct only if what happened to Detroit never happens again. The State of Michigan can sustain that finding in history only by fulfilling its constitutional, legal and moral obligation to assure that the municipalities in this state adequately fund their pension obligation. If the state fails, history will judge that this Court’s approval of that settlement was a massive mistake.”[80]

On the DIA settlement Judge Rhodes wrote, “Both the Michigan Attorney General and the DIA itself take the position that the DIA art is subject to a trust that prohibits the City from selling it to pay debts and places it beyond the creditors’ reach. The DIA also asserts that the donors of many of the pieces of art had imposed specific transfer restrictions on them.

The evidence supports these assertions. …The evidence further establishes that nationally accepted standards for museums prohibit the de-acquisition of art to pay debt.

…The creditors did submit substantial evidence and legal grounds supporting the contrary view that the City can legally sell or monetize the DIA art.

On balance, the Court concludes that in any potential litigation concerning the City’s right to sell the DIA art, or concerning the creditors’ right to access the art to satisfy its claims, the position of the Attorney General and the DIA almost certainly would prevail.

…The Court concludes that the DIA settlement was a most reasonable and favorable settlement for the City and its pension creditors. The Court readily approves it. Accordingly, the Court approves all aspects of the grand bargain.”

Retiree health care and other retiree benefits had a total claim of $4.3 billion. The creditors voted to approve the POA for the settlement of their claim. The City established two voluntary employees’ beneficiary associations, known as VEBAs, to provide post-employment benefits to retirees and certain of their beneficiaries and dependents. The City distributed B Notes and other assets to fund the VEBAs. The City will have no further responsibility to provide other post-employment benefits. The class voted to accept it by over 88%. The Court approved the OPEB settlement.

Judge Rhodes said in his confirmation of the POA said, “A large number of people in this City are suffering hardship because of what we have antiseptically called service delivery insolvency. What this means is that the City is unable to provide basic municipal services such as police, fire and EMS services to protect the health and safety of the people here. Detroit’s inability to provide adequate municipal services runs deep and has for years. It is inhumane and intolerable, and it must be fixed. This plan can fix these problems and the City is committed to it. So if to fix this problem, the Court must require these few creditors that rejected the plan to nevertheless share in the sacrifice that the other creditors have agreed to endure, then so be it.”

Judge Rhodes stated in his confirmation of the POA, “In conclusion, therefore, the Court finds that it is likely that the City of Detroit, after the confirmation of the plan of adjustment, will be able to sustainably provide basic municipal services to the citizens of Detroit and to meet the obligations contemplated in the Plan without the significant probability of a default. Accordingly, the Court finds that the City’s plan of adjustment is feasible.”[81]

On December 31, 2014, the Bankruptcy Court issued a supplemental opinion supporting the Confirmation Order. Detailed below are the highlights of the Judge’s opinion.

The testimony of Chief Craig established that the City was in a state of “service delivery insolvency” as of July 18, 2013, and will continue to be for the foreseeable future. He testified that the conditions in the local precincts were “deplorable.” “If I just might summarize it in a very short way, that everything is broken, deplorable conditions, crime is extremely high, morale is low, the absence of leadership.” He described the City as “extremely violent,” based on the high rate of violent crime and the low rate of “clearance” of violent crimes. He stated that the officers’ low morale is due, at least in part, to “the fact that they had lost ten percent pay; that they were forced into a 12-hour work schedule,” and because there was an inadequate number of patrolling officers, and their facilities, equipment and vehicles were in various states of disrepair and obsolescence.[82]

Judge Rhodes wrote, “Service delivery insolvency “focuses on the municipality’s ability to pay for all costs of providing services at the level and quality that are required for the health, safety, and welfare of the community.” Indeed, while the City’s tumbling credit rating, its utter lack of liquidity, and the disastrous COPs and swaps deal might more neatly establish the City’s “insolvency” under 11 U.S.C. § 101(32)©, it is the City’s service delivery insolvency that the Court finds most strikingly disturbing in this case.”[83]

On December 10, 2014, and in accordance with the Plan, the City: (1) issued $1.3 billion of debt of which $1.1 billion was delivered to various classes of creditors in satisfaction of their claims; (2) paid $110.1 million of cash including $73.1 million to various classes of creditors in satisfaction of their claims, $36.5 million to establish a Professional Fee Reserve account to pay the bankruptcy and restructuring professionals, and $0.5 million to satisfy debt issuance costs; (3) assigned debt service payments on the remaining $43.3 million of the original UTGO bonds primarily to the income stabilization funds for the General Retirement System (GRS) and Police and Fire Retirement System (PFRS); (4) issued settlement credits totaling $25.0 million to the insurers of the POCs; and (5) irrevocably transferred the assets of the Detroit Institute of Arts (DIA) to the DIA, as trustee, to be held in perpetual charitable trust, subject to dispositions in accordance with applicable national ethical standards for museums, and within City limits, for the primary benefit of residents of the City and residents of the State.

The City issued $1.3 billion of new debt/bonds under the POA. Major applications of the new debt included: (1) $492.7 million to fund the VEBAs for retiree health benefits; (2) $287.6 million to restructure a portion of the original UTGO debt; (3) $203.4 million to satisfy POC claims; (4) $120.1 million to refund the 2014 Financial Recovery Bonds (Quality of Life financing issued in April 2014); and (5) $85.7 million for restructuring initiatives.

The bankruptcy exit and settlement and discharge of claims under the Plan provided the City a total of $6.8 billion in aggregate debt relief. The largest settlements were with the City’s current employees and retirees. The City eliminated a net $8.3 billion of its obligations including $7.0 billion (84.3%) of pension and retiree benefits legacy costs.

The Expert report on the feasibility of the City’s POA was prepared by Martha Kopacz. Below are highlights from her report.

“The recent settlements and corresponding amendments to the POA have served the laudable goals of efficiently resolving disputes and garnering additional support for the Plan of Adjustment. Conversely, they have imposed additional financial obligations on the City. I have already expressed concerns regarding the level of contingency provided for in the Plan of Adjustment. The financial obligations associated with the recent settlements only intensify this concern. While my opinion is the Plan of Adjustment remains feasible and there is not yet a significant probability of default as described in the Standard, there is no denying the possibility of default has increased. It is not realistic or prudent to believe that the City could take on any additional Plan obligations and remain within the continuum of reasonableness necessary to establish feasibility.[84]

I believe the speed of this proceeding has negatively impacted the level of feasibility of the POA. This bankruptcy has been largely focused on deleveraging the City, often to the exclusion of fixing the City’s broken operations.” … The operational restructuring that often occurs with commercial reorganizations will be left largely to Mayor Duggan and his managers for the post confirmation period. That is unfortunate but is understandable given the speed with which this bankruptcy has occurred and the Emergency Manager’s priorities during his similarly short tenure.[85]

I can say, unequivocally, that without the positive and capable leadership of Mayor Duggan and the constructive relationship between the City Council and the Mayor, I would be unable to opine that the plan, as currently proposed, is feasible.”

Kopacz also noted, “Even after many years of practice with dysfunctional, insolvent, operationally troubled enterprises, I was confused by the City’s projections in POA…. This is convoluted and contributes to the feelings amongst many creditors in this case that the financial projections in the POA are a “black box” and that it was the City’s intent to obfuscate important information. I choose to believe that this was simply an unfortunate result of two advisory firms sharing responsibilities rather than one firm “owning” the financial projections start to finish, as is, and should be, the norm….[86] I believe it would have been preferable for a single firm to have prepared a single, integrated financial projection for the POA.”

CFO John Hill in his deposition on the bankruptcy confirmation acknowledged that he wrote the EM, “Kevyn just checking on an issue here. I was told that the Mayor apparently told you CM and EY stated that the Plan of Adjustment 10-year plan forecast is unrealistic and cannot be achieved.” [87] Hill also wrote, “I am of the opinion that if you look at Detroit’s history, any plan that has this many initiatives and ramp-up periods would be difficult.”

The POA was not realistic. The City did not generate most of the revenue initiatives that were projected in it. I was disappointed on what the consultants provided us considering the amount of money spent. It seemed their real benefit was in the bankruptcy — helping to expedite it and fulfill the requirements of the Court. They did a good job on this.

What seemed to me to be the height of hypocrisy, was when the Judge ruled in the POA confirmation that the fees paid to the attorneys, consultants and other professionals in the bankruptcy were reasonable. According to the Court, this was based primarily on the number and complexity of the issues in the case, the City’s extreme financial challenges, results obtained, the substantial reductions to which many professionals have agreed, and the lack of objections or negative comments regarding fees filed with the Court.[88]

Some attorneys were billed to the City at $1,000 per hour. The high fees paid to the lawyers and consultants in bankruptcy were shocking. Especially, considering the City couldn’t even pay for basic services.

Jones Day wrote:

“The City’s chapter 9 Case indisputably has been the largest and most complex in history. Unlike many other chapter 9 cases that focused on a discrete issue, the City’s bankruptcy was an all-encompassing debt and operational restructuring that left virtually no stone unturned. Jones Day had the leading role in almost every initiative of the City, including pension reform, healthcare changes, bond debt restructuring, new financings, new labor agreements, asset monetization and various operational restructuring initiatives, not to mention all aspects of the Chapter 9 Case itself and compliance with Michigan Public Act 436 of 2012 (“PA 436”).”

Jones Day summed up the complexity and its accomplishments with:

“The tasks presented not only were complex, numerous and multi-disciplinary, but also were on the cutting edge in untested areas of municipal law and chapter 9 practice. The chapter 9 Case has involved consideration of numerous complex issues and matters of first impression, including with respect to (a) the constitutionality of PA 436, (b) the City’s power to impair pension obligations in chapter 9, © the City’s ability to impair general obligation debt, (d) the various competing priorities under Michigan law of the City’s General Fund obligations, (e) the City’s ability to consummate the transactions contemplated by the so-called “Grand Bargain,” (f) the enforceability of the City’s pension certificates of participation (the “COPs”) and (g) the creation of a regional water and sewer authority. State, federal and constitutional issues all have been addressed throughout this case. These matters required the substantial creativity and effort of Jones Day and the City’s other professionals.” [89]

The Court’s review of professional fees and expenses in Chapter 9 was limited to a determination of whether they were “fully disclosed,” and whether they were “reasonable.” [90] The grand total for professional fees and expenses per the Court’s review in the bankruptcy case was $177.9 million. The actual total was $183.2 million; however, the State of Michigan reimbursed the City $5.3 million, bringing the total down to $177.9. These fees were 16% of the City’s 2014 General Fund total revenues.

The POA gave the City time to get its house in order. It cleared over $200 million in annual General Fund structural expenditures for ten years (2014–2023).

The City post-bankruptcy, working in accordance with the POA, was to provide better services and attract new residents and improve the City’s tax base. While Mayor Duggan and the City Council have done a great job to improve City services through 2021, it is uncertain whether the tax base has grown sufficiently. According to the latest (2020) census results, the population has not increased since the bankruptcy.

Starting on July 1, 2023, the City will have financial challenges (“the cliff”) that were deferred with the bankruptcy. The City’s General Fund will again have to pay over $100 million annually in legacy pension expenses to the pension funds. In addition, principal payments on the $1.3 billion long term debt issued in 2014 in accordance with the POA, much of it deferred for ten years, will increase.

The concept of the Grand Bargain was great and innovative. But it didn’t go far enough. Corners were cut and things weren’t thought through in order to expedite the conclusion of the bankruptcy. There should have been a thorough understanding and determination of the actual unfunded pension amount. This was not done and the Grand Bargain underestimated the legacy pension obligations.

The City’s bankruptcy actuary erred in estimating the City’s legacy pension liability for the bankruptcy and POA. They used outdated mortality tables and underestimated the liability. As a result, the Grand Bargain contribution and pension cuts were understated. In addition, giving the City a 10-year holiday from making legacy pension contributions was a big mistake resulting in more underfunding of the pension funds. With the two pension funds paying a total of around $600 million annually in pension benefits there wasn’t much room for error.

According to the City’s June 30, 2021 CAFR, the City had a $1.2 billion and $ 1.1 billion Net Pension Liability to the GRS and PFRS pension funds, respectively. This totals $2.3 billion. The POA anticipated that the pension obligations would total $1.0 billion after the Grand Bargain contributions and pension cuts were made.

On June 30, 2021 the legacy pension funds funding ratios were 59% and 67%, for the GRS and PFRS pension funds, respectively. If the funding ratios don’t improve by June 30, 2023, which appears unlikely, the City will incur excessive pension costs for these legacy pension funds which will strain the General Fund significantly greater than what was anticipated in the POA.

Shortly after its exit from bankruptcy in 2014, the City did find that the bankruptcy professionals underestimated the pension fund obligations and created a retiree protection trust fund to reduce the burden on the City’s General Fund for pension expenses starting in 2023. As of June 30, 2021, the City has set aside $235.4 million in the trust fund.

At a summit in 2015, Judge Rhodes said that in nine or ten years, Detroit will be required to make “very substantial contributions to its pension plans, and because there is not a strong constituency for pensions, I am concerned about whether the will to make those contributions will be there.” [91]

The POA settled the State’s potential liability for the underfunding of the GRS and the PFRS under the pension non-impairment provision of the Michigan constitution. The State contributed $194.8 million. The retirees by voting for the POA gave up their rights to sue the State for their pensions. If the City defaults again on the pensions the State has no obligation to pay them. In addition, the retirees were required to cease any litigation related to the Chapter 9 bankruptcy.[92] The City of Detroit retirees no longer have the State Constitution protection of their pensions. I don’t think many of the retirees who voted for the POA knew this.

The State through reductions of promised revenue sharing from 1999 to 2013 and restrictions on the local government’s ability to raise revenue contributed greatly to Detroit’s financial problems. In addition, the State’s failure to address Detroit’s financial problems delayed the inevitable and made it worse. The State’s approval of Detroit’s debt issuances from 2001–2012 also contributed to Detroit’s financial mess. The State was complicit in the City’s financial problems. It got off cheap with its miniscule pension contribution and benefitted greatly from the Bankruptcy Court’s dismissal from any further obligations for the City’s pension costs.

The potential for another Chapter 9 bankruptcy looms for Detroit especially if the economy takes a downturn and the State looks again to the City’s pensions for more relief. I believe the City will end up in bankruptcy again because the fundamental issues of an impoverished City without a sufficient tax base will never be able to pay for the education and other essential public services necessary to improve the quality of life of its citizens.

Robert Reich, former President Clinton’s Labor Secretary, wrote about the core problems of race and poverty in America which led to Detroit’s bankruptcy. He essentially asks are we not our brother’s keeper? Can you avoid your responsibilities by moving to another community? Who pays for poverty and the consequences of it? I’ve summarized his writings from an article on the bankruptcy dated September 5, 2014 below.[93]

“Detroit is really a model for how wealthier and whiter Americans escape the costs of public goods they’d otherwise share with poorer and darker Americans. Oakland County is the fourth wealthiest county in the United States, of counties with a million or more residents. In fact, Greater Detroit, including its suburbs, ranks among the top financial centers, top four centers of high technology employment, and second largest source of engineering and architectural talent in America.

The median household in Oakland County earned over $65,000 in 2013. The median household in Birmingham, Michigan, just across Detroit’s border, earned more than $94,000. In nearby Bloomfield Hills, still within the Detroit metropolitan area, the median was close to $105,000. Detroit’s upscale suburbs also have excellent schools, rapid response public safety, and resplendent parks.

Forty years ago, Detroit had a mixture of wealthy, middle class, and poor prior to its middle class white residents fleeing to the suburbs. By the time it declared bankruptcy, Detroit was almost entirely poor. Its median household income was $26,000. More than half of its children were impoverished. That left it with depressed property values, abandoned neighborhoods, empty buildings, and dilapidated schools. Forty percent of its streetlights didn’t work. More than half its parks closed.

Official boundaries are often hard to see. If you head north on Woodward Avenue, away from downtown Detroit, you wouldn’t know exactly when you left the city and crossed over into Oakland County — except for a small sign that tells you. But boundaries can make all the difference. Had the official boundary been drawn differently to encompass both Oakland County and Detroit — creating, say, a “Greater Detroit” — Oakland’s more affluent citizens would have some responsibility to address Detroit’s problems, and Detroit would likely have enough money to pay all its bills and provide its residents with adequate public services.

But because Detroit’s boundary surrounds only the poor inner city, those inside it have to deal with their compounded problems themselves. The whiter and more affluent suburbs (and the banks that serve them) are off the hook. Any hint they should take some responsibility has invited righteous indignation. “Now, all of a sudden, they’re having problems and they want to give part of the responsibility to the suburbs?” scoffs L. Brooks Patterson, the Oakland County executive. “They’re not gonna’ talk me into being the good guy. ‘Pick up your share?’ Ha.”

Buried within the bankruptcy of Detroit is a fundamental political and moral question: Who are “we,” and what are our obligations to one another?[94] Are Detroit, its public employees, poor residents, and bondholders the only ones who should sacrifice when “Detroit” can’t pay its bills? Or does the relevant sphere of responsibility include Detroit’s affluent suburbs — to which many of the city’s wealthier resident fled as the city declined, along with the banks that serve them?

[Should they pay for the blighted homes and factories they left behind? Should they pay for the legacy pension and retiree health care that was incurred when they lived in the City?]

The POA doesn’t address these questions. But as Americans continue to segregate by income into places becoming either wealthier or poorer, the rest of us will have to answer questions like these, eventually.”[95]

[1] Orr Kevyn, Re: POC Payment Due June 14, 2013, June 13, 2013, E-mail

[2] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[3] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[4] Cockrel Sheila, “Sheila Cockrel: Voting isn’t the only fundamental right at stake in Detroit’s EFM debate”, March 17, 2013, Detroit Free Press

[5] Bing Dave, “Commentary Detroit must redefine leadership”, August 30, 2009, Detroit News

[6] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[7] Stephens Tom, “Counterpunch Magazine Zen Throat Cutting in Detroit”, June 18, 2013, Black Agenda Report

[8] Finley Allysia, “Kevyn Orr: How Detroit Can Rise Again”, August 2 2013, Wall Street Journal

[9] Finley Allysia, “Kevyn Orr: How Detroit Can Rise Again”, August 2 2013, Wall Street Journal

[10] Snell Robert and Wilkinson Mike, “Big pension payouts threatened by Detroit crisis”, July 3, 2013, Detroit News

[11] Detroit News, “EM’s biggest task: Tackling Detroit’s pension obligations”, April 5, 2013

[12] Bankruptcy, “Emergency Manager’s Financial and Operating Plan”, May 12, 2013

[13] Finley Allysia, “Kevyn Orr: How Detroit Can Rise Again”, August 2 2013, Wall Street Journal

[14] Orr Kevyn, “DECLARATION OF KEVYN D. ORR IN SUPPORT OF CITY OF DETROIT, MICHIGAN’S STATEMENT OF QUALIFICATIONS PURSUANT TO SECTION 109(c) OF THE BANKRUPTCY CODE”, Filed July 18, 2013

[15] Bomey Nathan, “Detroit workers cashed $756M in pension fund’s 13th checks, retirees got $195M”, October 2, 2013, Detroit Free Press

[16] Bomey, Nathan and Gallagher John, “Nearly $1 billion in bonuses paid from ailing Detroit pension fund”, September 8, 2013, Detroit Free Press

[17] Bomey Nathan, “Detroit workers cashed $756M in pension fund’s 13th checks, retirees got $195M”, October 2, 2013, Detroit Free Press

[18] Bomey, Nathan and Gallagher John, “Nearly $1 billion in bonuses paid from ailing Detroit pension fund”, September 8, 2013, Detroit Free Press

[19] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[20] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[21] Finley Allysia, “Kevyn Orr: How Detroit Can Rise Again”, August 2 2013, Wall Street Journal

[22] Disalvo Daniel and Eide Stephen, “When Cities Are at the Financial Brink”, January 2017, Manhattan Institute

[23] Moore Charles, “EXPERT REPORT OF CHARLES M. MOORE, CPA, CTP, CFF to the Bankruptcy Court”

[24] Kleine Robert, “How State Helped to Bankrupt Detroit”, August 4, 2013, Detroit Free Press

[25] Kleine Robert, “How State Helped to Bankrupt Detroit”, August 4, 2013, Detroit Free Press

[26] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[27] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[28] Disalvo Daniel and Eide Stephen, “When Cities Are at the Financial Brink”, January 2017, Manhattan Institute

[29] Conway MacKenzie, “THE M&A ADVISOR CASE STUDY”, July 2015

[30] Bhatti Saqib, “Why Chicago Won’t Go Bankrupt — And Detroit Didn’t Have To”, June 22, 2015, inthesetimes.com

[31] Disalvo Daniel and Eide Stephen, “When Cities Are at the Financial Brink”, January 2017, Manhattan Institute

[32] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[33] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[34] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[35] Bankruptcy, “MOTION OF THE DETROIT RETIREMENT SYSTEMS TO CERTIFY THIS COURT’S ELIGIBILITY RULING FOR DIRECT APPEAL TO THE SIXTH CIRCUIT COURT OF APPEALS”

[36] Bankruptcy, “MOTION OF THE DETROIT RETIREMENT SYSTEMS TO CERTIFY THIS COURT’S ELIGIBILITY RULING FOR DIRECT APPEAL TO THE SIXTH CIRCUIT COURT OF APPEALS”

[37] Bankruptcy, “MOTION OF THE DETROIT RETIREMENT SYSTEMS TO CERTIFY THIS COURT’S ELIGIBILITY RULING FOR DIRECT APPEAL TO THE SIXTH CIRCUIT COURT OF APPEALS”

[38] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[39] Stryker Mark and Todd Brian, “DIA in peril”, Detroit Free Press

[40] Stryker Mark and Todd Brian, “DIA in peril”, Detroit Free Press

[41] Rhodes Steven, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit Bankruptcy”, November 7, 2014

[42] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[43] CRC, CITIZENS RESEARCH COUNCIL OF MICHIGAN, “AN ANALYSIS of the PROPOSED CONSTITUTION January 25, 1963, BUDGETING, ACCOUNTING, PENSION AND DEBT PROVISIONS”

[44] Schuette Bill, “ATTORNEY GENERAL BILL SCHUETTE’S STATEMENT REGARDING THE MICHIGAN CONSTITUTION AND THE BANKRUPTCY OF THE CITY OF DETROIT”, August 19, 2013

[45] Schuette Bill, “ATTORNEY GENERAL BILL SCHUETTE’S STATEMENT REGARDING THE MICHIGAN CONSTITUTION AND THE BANKRUPTCY OF THE CITY OF DETROIT”, August 19, 2013

[46] Lessenberry Jack, “Detroit pension cuts contradict Michigan constitution”, February 24, 2014, Metro Times

[47] Bankruptcy, “ORDER CONFIRMING EIGHTH AMENDED PLAN FOR THE ADJUSTMENT OF DEBTS OF THE CITY OF DETROIT”, November 12, 2014

[48] Bankruptcy, “MOTION OF THE DETROIT RETIREMENT SYSTEMS TO CERTIFY THIS COURT’S ELIGIBILITY RULING FOR DIRECT APPEAL TO THE SIXTH CIRCUIT COURT OF APPEALS”

[49] Hill John, “The Videotaped deposition of JOHN W. HILL Taken at 51 Louisiana Avenue, N.W., Washington, D.C.”, July 18, 2014

[50] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[51] Bankruptcy, “MOTION OF THE DETROIT RETIREMENT SYSTEMS TO CERTIFY THIS COURT’S ELIGIBILITY RULING FOR DIRECT APPEAL TO THE SIXTH CIRCUIT COURT OF APPEALS”

[52] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[53] Lessenberry Jack, “Detroit pension cuts contradict Michigan constitution”, February 24, 2014, Metro Times

[54]Conway Mackenzie, “THE M&A ADVISOR CASE STUDY”, July 2015

[55] Bankruptcy, “OBJECTIONS AND BRIEF IN SUPPORT OF OBJECTIONS OF CREDITORS Doc 5788”, July 7, 2014

[56] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[57] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[58] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[59] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[60] Rhodes Steven, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit”, November 7, 2014

[61] DWSD, “DWSD STATUS AND BUSINESS ISSUES -BOARD OF COMMISSIONER STUDY SESSION OAKLAND COUNTY, MICHIGAN”, February 11, 2014

[62] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[63] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[64] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[65] Bankruptcy, “MOTION OF THE DETROIT RETIREMENT SYSTEMS TO CERTIFY THIS COURT’S ELIGIBILITY RULING FOR DIRECT APPEAL TO THE SIXTH CIRCUIT COURT OF APPEALS”

[66] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[67] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[68] Bankruptcy, “Opinion Regarding Eligibility Docket #1945”, Filed: December 5, 2013

[69] Rhodes Steven, “Supplemental Opinion Regarding Plan Confirmation, Approving Settlements, and Approving Exit Financing Doc 8993”, December 31, 2014

[70] Rhodes Steven, “Supplemental Opinion Regarding Plan Confirmation, Approving Settlements, and Approving Exit Financing Doc 8993”, December 31, 2014

[71] Metro Times, “From the start, that figure has been a fiction, pumped up by Emergency Manager Bankruptcy costs Detroit retirees”, November 6, 2014, Detroit Metro Times

[72] Bankruptcy, “OFFICIAL COMMITTEE OF RETIREES’ MEMORANDUM OF LAW IN SUPPORT OF CONFIRMATION OF FIFTH AMENDED PLAN FOR ADJUSTMENT OF DEBTS FILED BY THE CITY OF DETROIT, MICHIGAN Doc 6508”, August 4, 2014

[73] Metro Times, “From the start, that figure has been a fiction, pumped up by Emergency Manager Bankruptcy costs Detroit retirees”, November 6, 2014, Detroit Metro Times

[74] Bankruptcy, “OFFICIAL COMMITTEE OF RETIREES’ MEMORANDUM OF LAW IN SUPPORT OF CONFIRMATION OF FIFTH AMENDED PLAN FOR ADJUSTMENT OF DEBTS FILED BY THE CITY OF DETROIT, MICHIGAN Doc 6508”, August 4, 2014

[75] Rhodes Steven, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit Bankruptcy”, November 7, 2014

[76] Howes Daniel, Livengood Chad, and Shepardson David, “Bankruptcy and beyond for Detroit”, November 13, 2014, Detroit News

[77] Van Dusen Amanda, “Defaulted debt service payments question”, September 11, 2014, E-Mail

[78] Rhodes Steven, “ORDER CONFIRMING EIGHTH AMENDED PLAN FOR THE ADJUSTMENT OF DEBTS OF THE CITY OF DETROIT”, November 12, 2014

[79] Steven Rhodes, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit Bankruptcy”, November 7, 2014

[80] Steven Rhodes, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit Bankruptcy”, November 7, 2014

[81] Steven Rhodes, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit Bankruptcy”, November 7, 2014

[82] Rhodes Steven, “Judge’s eligibility confirmation”, December 5, 2013

[83] Rhodes Steven, “Judge’s eligibility confirmation”, December 5, 2013

[84] Steven Rhodes, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit Bankruptcy”, November 7, 2014

[85] Kopacz Martha E.M., “EXPERT REPORT OF MARTHA E.M. KOPACZ REGARDING THE FEASIBILITY OF THE CITY OF DETROIT PLAN OF ADJUSTMENT (Doc7148–4)”, August 27, 2014

[86] Kopacz Martha E.M., “EXPERT REPORT OF MARTHA E.M. KOPACZ REGARDING THE FEASIBILITY OF THE CITY OF DETROIT PLAN OF ADJUSTMENT (Doc7148–4)”, August 27, 2014

[87] Hill John, “The Videotaped deposition of JOHN W. HILL Taken at 51 Louisiana Avenue, N.W., Washington, D.C.”, July 18, 2014

[88] Rhodes Steven, “Amended Opinion and Order Regarding the Reasonableness of Fees Under 11 U.S.C. § 943(b)(3) Doc 9257”, February 12, 2015

[89] Jones Day, “STATEMENT OF JONES DAY ON THE REASONABLENESS OF FEES AND EXPENSES IT INCURRED AS LEAD COUNSEL TO THE CITY OF DETROIT Doc 9076”, January 16, 2015

[90] Rhodes Steven, “Amended Opinion and Order Regarding the Reasonableness of Fees Under 11 U.S.C. § 943(b)(3) Doc 9257”, February 12, 2015

[91] Conway Mackenzie, “THE M&A ADVISOR CASE STUDY”, July 2015

[92] Steven Rhodes, “Judge’s Confirmation ORAL OPINION ON THE RECORD In re City of Detroit Bankruptcy”, November 7, 2014

[93] Reich Robert, “The Bankruptcy of Detroit and the Division of America”, September 5, 2014

[94] Reich Robert, “The Bankruptcy of Detroit and the Division of America”, September 5, 2014

[95] Reich Robert, “The Bankruptcy of Detroit and the Division of America”, September 5, 2014