Michigan Gov. Rick Snyder announced a plan Wednesday to commit $350 million in state funds to help shore up Detroit's pension funds and prevent valuable city-owned art from being sold to pay the bankrupt city’s debts.
Snyder, a Republican, joined legislative leaders in outlining a proposal that would provide the money over 20 years. They acknowledged it may be a hard sell in the GOP-controlled legislature, but said it was better than a protracted legal fight over pensions in a city facing an estimated $18 billion debt.
The governor was quick to say the money wouldn't be a bailout, but rather a way to help Detroit settle its bankruptcy quickly and allow it to recover.
"If Michigan's to be a great state again, we need Detroit on a positive path to success," Snyder said.
The money would match the roughly $330 million that local and national charitable foundations have pledged so far to help the insolvent city, including protecting valuable works at the Detroit Institute of Arts that could be sold as part of the bankruptcy.
Before Wednesday, Snyder hadn't publicly talked much about any potential state aid to Detroit, partly because discussions between the city and its creditors with federal mediators are private.
Snyder had privately gauged support among lawmakers last week for the plan — and he's facing politically tricky terrain.
Some legislators are worried that state financial assistance to Detroit could set a precedent if other cities collapse, while others have their own spending priorities elsewhere in the state. Election-year politicking also could come into play.
Before Wednesday's announcement, Republican Senate Majority Leader Randy Richardville said he liked the proposal but cautioned that the full Senate wasn't yet on board. Richardville also said it would not be a "bailout of Detroit at all," but would rather help retirees who now live across the state.
"It does a lot to help people out, and I think it's worthy of consideration," said Richardville, who is from Monroe in the southeast corner of Michigan.
Detroit's state-appointed emergency manager, Kevyn Orr, has said two pension funds are underfunded by $3.5 billion. A deal involving the state and charitable foundations would help retirees but probably not cover all of their pensions.
Richardville declined to say if state aid also could be used to help with retirees' health care costs. He gave no timetable for potential legislative action, but said it would be "sooner rather than later."
"These are people that have earned a pension, have earned health care, and we're going to do what we can to help them out," Richardville said.
Sen. Bert Johnson, a Democrat who represents part of Detroit, also said the plan could prove to be a hard sell in the legislature.
"Some very viable programs have been cut over the past three years," he said.
Johnson said he wants to see specifics on how pensioners would be helped. He also wants assurances that control of pensions is vested with the city; Republicans have talked about outside oversight of what critics says are mismanaged funds.
"If this can be a major component of solving the bankruptcy and workers end up in a good position and the city of Detroit can walk away with a clean slate, it's something we have a responsibility to look at," Johnson said ahead of Snyder's announcement.
Mediators between the city and its creditors said in a statement that they hoped Snyder's announcement would help the parties reach as many agreements as possible that can be included in a plan to take Detroit out of bankruptcy.
"The mediators acknowledge that the question of state participation will now move to the legislative process, and urge that all parties approach the issue with an open mind," a statement by the mediators said.
In September, officials from the Obama administration, including chief economic adviser Gene Sperling, indicated that at least $300 million dollars in federal and private aid would go to the struggling city.
http://www.thetimesherald.com/article/20140122/NEWS05/301220007
A settlement of Detroit’s bankruptcy that would protect city retirees and the collection at the Detroit Institute of Arts appeared closer Wednesday after Gov. Rick Snyder pledged $350 million to a growing rescue fund designed to bring all the major parties together in a grand resolution.
“This is a settlement; this is not a bailout,” Snyder said at a news conference.
U.S. Bankruptcy Judge Steven Rhodes also put his weight behind a grand bargain Wednesday, saying in a separate hearing that he might not allow DIA artwork ever to be sold to satisfy city debts.
The state money would be added to a pot that already includes $330 million from nine national and local foundations. The foundation money would be given only if a larger bankruptcy resolution is reached that includes spinning off the DIA from city control into its own independent nonprofit forever shielded from city finances.
As well, Snyder said the state money for pensioners — likely drawn from state tobacco settlement money — would be conditional on a larger bankruptcy settlement that included unions and retirees and that ended all court cases. He also would require Detroit’s two pensions to be managed in the future by independent professionals.
“Let’s put this behind us so we don’t have ongoing lawsuits ... so we all can focus on growing Detroit,” said Snyder, who stressed repeatedly that the money was not a bailout for Detroit. He said the state money “will not make retirees whole, but it will significantly reduce the burden they would otherwise face.”
After the governor’s announcement, the DIA issued a statement with leaders pledging to make a “significant contribution” to the rescue effort, but the statement didn’t say how much the museum was willing to bring to the table.
Despite the conciliation and growing commitments, huge obstacles remain to a grand bankruptcy settlement free of litigation and other delays.
The state funding must be approved by a Legislature in which lawmakers oppose anything that smacks of a Detroit bailout.
The Detroit pension boards must agree to the management changes demanded by Snyder.
The DIA must contribute enough to satisfy Detroit emergency manager Kevyn Orr.
Unions, retirees and other parties must sign off on a deal and forgo further litigation.
Creditors balk
Some creditors were already balking on Wednesday, increasing the likelihood they’ll reject the foundation deal because it doesn’t deliver enough cash compared to a broad sale of DIA assets, which they believe could net billions.
Steve Spencer, a financial adviser for Financial Guaranty Insurance Co., one of Detroit’s opponents in bankruptcy court, said he’s “troubled by the policy implications of the state favoring art ahead of the economic realities and recovery interests of the city’s pensioners, bondholders and other unsecured creditors.”
“We find it incredible that the city is being allowed to leave such a valuable art collection untouched when it can’t provide basic services and is proposing to essentially walk away from its debt obligations,” Spencer said in a statement.
But Rhodes refused Wednesday to approve a creditor proposal to evaluate all of the DIA’s artwork for potential sale and signaled that he’s not sure the museum’s property can be sold to satisfy the city’s estimated $18 billion in long-term debt and liabilities.
The judge cautioned against one-time fixes for the city’s finances, instead urging Detroit and creditors to forge a negotiated resolution to the largest municipal bankruptcy in U.S. history.
In an unusually firm lecture from the bench, Rhodes said it’s “not the time for defiant swagger, dismissive pound-the-table, take-or-leave-it proposals.”
The future of the DIA won’t be decided until Rhodes approves the city’s bankruptcy restructuring plan, which is expected to be introduced for the first time in mid-February.
DIA's role
Spearheaded by Chief U.S. District Judge Gerald Rosen, the federal mediator for the bankruptcy, nine national and local foundations earlier pledged $330 million to create a rescue fund to reduce pension cuts, prevent art from being sold and spin off the DIA into a private nonprofit. If approved, the so-called grand bargain would help pave the way for a much swifter and less painful resolution to Detroit’s historic Chapter 9 bankruptcy.
“I clearly would encourage donors to the DIA to join us,” Snyder said in an interview Wednesday with the Free Press. “The DIA would be a major beneficiary if the settlement would occur,” he said. Also, “by having more participation, hopefully we could get a settlement.”
DIA leaders are dancing on a tightrope, trying to to find a way to contribute enough to satisfy Orr without sacrificing their ability to raise hundreds of millions of dollars in critical endowment dollars and annual operating funds over the next decade.
Sources close to the negotiations have told the Free Press that the city considers $100 million over 20 years a reasonable target for the DIA. But museum leaders have previously rejected $100 million as not feasible.
“The DIA remains focused on continuing conversations with the mediation team, state, county and city officials, our board members, staff and supporters to determine how we can be as productive and supportive as possible in this process, with the ultimate goal of a balanced, achievable solution,” the museum’s statement said.
Any significant DIA fund-raising effort will likely mean that museum will have to find a way to lasso new individual and corporate donors not already heavily invested in the museum.
The DIA operates on an annual budget of roughly $32 million, surviving primarily on a tri-county tax millage voters passed in 2012 that makes up roughly 70% of its annual budget. The DIA also raises about $12 million a year from donors. At the same time, the museum has committed to raising some $200 million in endowment funds — a nest egg that earns income — to replace dollars from the millage when it expires in 2022.
The DIA raises about $12 million annually, and board chairman Gene Gargaro has said an additional $5 million annual burden would stretch beyond the museum’s means, particularly as the museum turns its attention to raising endowment dollars.
Tough sell
Snyder was joined at the news conference by Senate Majority Leader Randy Richardville, R-Monroe, and House Speaker Jase Bolger, R-Marshall. Both pledge support for the plan, which requires approval of the Legislature, but acknowledged it may not be an easy sell.
Bolger said he and other legislative leaders have taken on tough fights before. Bolger noted Attorney General Bill Schuette has said all public pension monies must be protected under Michigan’s constitution, and while there is disagreement about that, a settlment is needed to protect taxpayers against potential litigation.
While there is anger against Detroit, “I won’t cut off taxpayers’ noses to spite Detroit,” Bolger said.
GOP lawmakers noted many Detroit retirees no longer live in Detroit, so it’s not just a Detroit issue.
Democratic leaders and lawmakers, including Senate Minority Leader Gretchen Whitmer, D-East Lansing, also spoke positively about the proposal.
But other lawmakers were less receptive.
“I’m not prepared to vote for mid-Michigan tax dollars to go to Detroit,’ said Sen. Rick Jones, R-Grand Ledge.
“I represent mid-Michigan, and my taxpayers want money to go to our roads and our schools and our cities and townships,” he said.
Not a done deal
Snyder said the city’s General Retirement System has been more poorly managed than the Detroit Police and Fire Retirement System, but said the state wants to be sure both funds are professionally managed.
Citing the ongoing mediation, pension officials wouldn’t comment on the proposed change in fund management.
Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, said “we are hopeful that the mediation process will bear fruit to generate funds to assist the City of Detroit in making its obligation payments to the retirement system,” but “there is not a final solution until all parties agree on the details.”
Michigan receives payments of about $250 million a year from a 1998 settlement Michigan and 45 other states reached with tobacco manufacturers. Much of that ongoing money has been committed to Michigan’s 21st Century Jobs Fund. Redirecting money requires changing state law.
Orr praised “an unprecedented commitment of public and private resources to help the City of Detroit fulfill its commitments to retirees and preserve one if its cultural jewels, the Detroit Institute of Arts.”
“The level of proposed investment by the philanthropic community and the state will go far in helping reach a timely and positive resolution of the city’s financial emergency,” Orr said.
Bankruptcy lawyer Doug Bernstein, whose firm represents the Ford Foundation in mediation efforts, said that even with state financial support, the deal is by no means completed. He noted that Rhodes has told lawyers during the case, “I don’t do fait accomplis,” referring to the rubber-stamping of agreements brought to him by parties in the case.
Ultimately, such deals must comply with the federal bankruptcy code, and Rhodes has made it clear he intends to decide matters as such, Bernstein said.
“This is all good progress, but until Judge Rhodes says so, it’s not a deal — it’s the framework of a deal,” Bernstein said.
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