DETROIT — Representatives of Detroit’s active and retired public workers met behind closed doors Wednesday with the restructuring team of the city’s state-appointed emergency manager, who is seeking huge cuts in pension benefits and health insurance to avoid the largest municipal bankruptcy in U.S. history.
Emergency manager Kevyn Orr did not speak to reporters ahead of Wednesday’s meeting, but a lawyer for some of the pensioners says they were summoned by Orr for a presentation.
“We have not had true discussions with Orr’s team,” said Michael Van Overbeke, general counsel for Detroit General Retirement System, which represents all city retirees except police and fire. “We received information but we’d like to sit down at the table and have a serious discussion about what he’s proposing.”
Some bankruptcy experts say the session could be the tipping point that leads to an unprecedented bankruptcy. The city’s retirement system is underfunded by $3.5 billion. The city’s budget deficit is about $380 million. Orr has said long-term debt could surpass $17 billion.
How Detroit’s pensions emerge under Orr’s restructuring or a restructuring under a Chapter 9 bankruptcy reflect the problems such systems have had across the country.
Cities in New York state have been tiptoeing along the same path Detroit has gone down, threatened with insolvency because declining revenues have slogged behind health care and pension costs.
Stockton, Calif., declared bankruptcy earlier this year in part because of pension bond debt.
Moody’s rating service has said pension borrowing can be seen as “part of a continuous pattern of reliance on one-time resources.”
Orr has ordered an investigation by Detroit’s auditor general and inspector general into possible waste, abuse, fraud and corruption in the city’s two pension funds and all employee benefit programs. He also wants to cut into health care and pensions as part of city debt restructuring.
Orr and his restructuring team met last month with about 180 bond insurers, pension trustees, union representatives and other creditors on concessions needed to keep Detroit out of bankruptcy.
His team said then that Detroit is defaulting on about $2.5 billion in unsecured debt and is asking creditors to take about 10 cents on the dollar of what the city owes them. Underfunded pension claims likely would get less than that.
Turnaround expert James McTevia and his Bingham Farms, Mich.-based McTevia & Associates has worked with Detroit’s pension systems in the past. He said the city has not made contributions into both funds over the years and used the money to help pay municipal bills.
“As a result of the pension funds allowing the city to do that, the city wants to pay the pension funds substantially less than they’re owed,” McTevia said. “Police and firefighters, these are guys who are on the line more than any other creditor, bank or other institution. They have their lives on the line. They know at a certain point in their lives they are going to be able to retire on a pension.”
In a bankruptcy, there is a chance that a judge will lump what’s owed the pensions and money owed creditors as unsecured debt, he added. All the parties then would have to stand in line for whatever scraps remain once secured debt holders receive their cuts.
McTevia said secured creditors, such as those holding water utility bonds or those who have mortgages, would be first in line in a bankruptcy court. Next up would be priority creditors which include wage and tax claims. The lower rung is made up of those deemed unsecured.
“I think Orr is going to get to the point where he has enough ammunition to justify a Chapter 9; enough people who are not willing to get on the bus,” McTevia said. “Orr will, justifiably, be able to blame this on the creditors.”
If a bankruptcy judge determines Detroit’s bond debt to be unsecured, it could change the way investors buy bonds from municipalities needing to make improvements, McTevia said.
“It would send tremors through the whole bond industry — cities, states, roads, schools,” he said. “This is a very major event if those bonds are adjudicated to be unsecured creditors and forced to accept what Orr is putting out.”