Friday, January 31, 2014

Key Pieces of EM's Plan for Detroit Reorganization

Key pieces of Detroit's proposed reorganization plan

8:43 PM, January 31, 2014
By Brent Snavely, Alisa Priddle and Mark Stryker
Detroit Free Press Business Writers

Below are highlights of the City of Detroit’s proposed plan of adjustment that was given to creditors this week.

The 99-page plan is full of blanks to be filled in when dollar figures are nailed down in areas such as cuts and changes to retiree pensions and health care plans.

The draft plan, labeled confidential, must be approved by U.S. Bankruptcy Judge Steven Rhodes and voted on by Detroit’s creditors. Here are key proposals of the plan:

■ Detroit would transfer ownership of art housed at the Detroit Institute of the Arts to a new charitable trust called DIA Corp.

■ The plan codifies the federally mediated DIA-state bargain in which money pledged from national and local charitable foundations and the DIA will go to pensions in exchange for the museum being spun off from city ownership into an independent nonprofit. While figures are not specified in emergency manager Kevyn Orr’s plan, the DIA agreed earlier this week to raise $100 million over 20 years, and the foundation total reached $370 million. An additional $350 million in state support for the pension fund has been proposed.

■ The plan of adjustment is conditioned on the foundations’ participation in a promise that they will continue to make contributions to the DIA’s annual operations and its endowment campaign.

■ The plan of adjustment requires “appropriate governance and oversight structures at the DIA,” including representation by the city, funding parties and other stakeholders. The specifics currently are in negotiation, but options might include board representation or the creation of an advisory body.

■ As is common with all bankruptcy cases, Detroit’s reorganization plan calls for “exit financing,” or a new line of credit from a group of banks and lenders that the city can use to operate city departments and services.

■ The plan recommends setting up a health care trust called the Detroit VEBA to manage retiree insurance benefits — much like Detroit’s automakers did in 2007 when the UAW agreed to allow the Detroit Three to offload health care liabilities into a separate entity called the UAW Retiree Medical Benefits Trust.

■ The plan recommends the pension funds use 6.25% as the expected investment rate of return going forward, down from the current 7.9% and 8% that Orr has said are overly optimistic. In expecting better returns, the funds have contributed less.

■ It recommends that many pension fund changes be locked in place for 10 years, creating some stability and preventing any new deals that could have ramifications later.

■ The plan also proposes the city and regional counties create the Great Lakes Water and Sewer Authority. The city and the new authority would enter into a 40-year lease of the counties’ water facilities.

■ The water and sewer authority will make an average annual payment under the lease of approximately $47 million to the city. This payment will be renegotiated after the 40th year, if the term of the lease extends beyond its 40th year.

■ The water and sewer authority board would consist of two members from each county, two members from the city and one gubernatorial appointee.

Contact Brent Snavely: 313-222-6512 or Follow him on Twitter @BrentSnavely.

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