Over the Memorial Day weekend, while many around the country were enjoying beautiful weather, the lawyers for the city of Detroit were busy filing a lengthy defense to their proposed restructuring plan, which is slated to be heard when trial begins on July 24. Of the over six hundred formal objections to the plan of adjustment, one of the chief complaints is that the plan would treat pensioners and bondholders inequitably, with the bondholders getting the proverbial short end of the stick.
Specifically, the plan proposes to pay pensioners roughly sixty cents on the dollar, whereas bondholders and other unsecured creditors would receive only ten cents on the dollar. On a monthly basis, this cut amounts to approximately 4.5% from the monthly pension checks sent to civilian retirees, while police and fire retirees would not face any cuts.
As we noted in a previous post, the sale of the Detroit Institute of Art’s collection has been a hotly contested topic. On the one hand the collection is valued at $816 million dollars, and its sale would satisfy a large percentage of the city’s debts. On the other hand, the DIA is a cultural cornerstone of the city and the state. What emergency manager Kevyn Orr has proposed has earned the moniker the “Grand Bargain” by many commentators. Under Orr’s Grand Bargain, the DIA collection will be sold to a private trust through philanthropic gifts and a lump sum payment from the Michigan government. The proceeds of the sale would be used to reduce the city’s pension fund debt.
Bondholders are crying foul, arguing that the Grand Bargain is simply a fraudulent transfer of the DIA at a significant discount. In response, the city noted that the art has been held in an implied public trust for the benefit of residents of the city and state and that the city is bound to the promises made to the collection’s many donors to not sell or give away the art. Sale of the collection to a private trust, however, would be appropriate and consistent with such promises, as the beneficiaries would remain the same. Indeed, the city argued that the creditors “never had any rights to the [collection] or any expectation that such charitable property would be available to satisfy their debts.”
Orr’s restructuring plan is backed by the DIA as well as several major creditors including the Official Committee of Retirees, the city’s two independently run pension boards, a group of retiree associations and the city’s largest employee union, all of whom have agreed to back the Grand Bargain so long as it is also agreed to by the city’s retirees.