Updated Thursday, July 24, 2014 as of 4:05 PM ET
Practice - Retirement Planning
Detroit Is Offered $350 Million by Governor to Ease Pension Cuts
Thursday, January 23, 2014
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(Bloomberg) -- Michigan would pay $350 million over 20 years to reduce bankrupt Detroit’s pension liabilities under a deal struck by Governor Rick Snyder and lawmakers.

The money would be in addition to $330 million that nine foundations pledged through bankruptcy-court mediation to reduce city pension cuts and to shield Detroit’s art collection from a sale to pay $11.5 billion in unsecured debt. The money should be linked to a broader settlement that would protect the masterworks, Snyder said yesterday at news briefing in Lansing.

Snyder, a Republican, also called for independent management of Detroit’s retirement system, which is run by two appointed boards. He declined to say how that might occur, though he said it wouldn’t necessarily be through state control.

“This is a settlement; this is not a bailout,” said Snyder, who was joined at the news briefing by Michigan House Speaker Jase Bolger and state Senate Majority Leader Randy Richardville, both Republicans. Snyder said the state money would ease cuts to pensions under a restructuring of Detroit’s debt.

Detroit filed for bankruptcy in July, claiming $11.5 billion in unsecured debt that it can’t pay and maintain basic services for Michigan’s largest city of about 700,000 residents. Creditors have pressured Detroit Emergency Manager Kevyn Orr to sell some of the city’s art collection, among other assets, to settle debt.

WORKING TOGETHER

The judge in the case yesterday denied a creditor’s request for a role in the valuation of the collection. U.S. Bankruptcy Judge Steven Rhodes said he can’t force the city to include creditors in decisions about the art.

Snyder said cooperation will lead to a better outcome for the city and the state.

“If we can participate in something to settle more effectively, faster and better, that’s a tremendous advantage for all of Michigan,” he said.

The plan would need approval from the Republican-controlled legislature, which has been reluctant to consider aid to largely Democratic Detroit. The $350 million may come out of about $250 million Michigan receives annually under a 1998 court settlement to compensate states for the cost of illnesses caused by smoking.

One option is to issue a bond and use the tobacco settlement to pay it off, Snyder said.

The fund, which also is used for other programs, has $76.6 million available this fiscal year and a projected $53.2 million next year, according to the Michigan House Fiscal Agency. 

ECONOMIC RECOVERY

Bolger said allowing Detroit’s bankruptcy to drag out would harm the state’s economic recovery.

“This offer is right for the full state of Michigan, as well as the citizens and pensioners of Detroit,” Bolger said.

Bolger and Richardville said lawmakers want assurances that the state money would produce lasting financial relief with proper oversight.

Republican Roger Kahn, chairman of the Senate Appropriations Committee, said he was skeptical whether such a plan would be accepted by creditors or the bankruptcy court.

“It’s hard for me to get enthusiastic about using state money that could be used, for example, for roads,” he said.

Orr, the state-appointed emergency manager, has said the combined debt of Detroit’s two retirement systems is as much as $3.5 billion. Pension officials have said the figure is inflated.

Snyder said if a combined $700 million from the state and private foundations goes toward reducing pension liabilities, “it’s very important there be professional management of those resources.”

Those comments drew objections from state Representative David Nathan, a Detroit Democrat who said the retirement systems rely on professional financial managers for investments.

“To suggest there are no professionals down in Detroit handling the pension system is ludicrous,” Nathan said in an interview. “The board has people that advise them.”

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