Saying the fate of the Detroit Institute of Arts and easing pension cuts in Detroit’s bankruptcy are critical to the city’s future, representatives of Detroit’s three automakers today committed $26 million to the grand bargain on which much of the city’s exit from bankruptcy is based.
The donations are about preserving the city’s cultural heritage and helping pensioners facing steep cuts to retirement benefits, but “most importantly this money is intended to help the Motor City get back on its feet again,” said Reid Bigland, an executive for Chrysler, which is donating $6 million to the DIA-pension deal. “This is really about being a contributor and working with those who are also committed to revitalizing this city.”
General Motors and Ford and their charitable arms also are donating $10 million apiece…
Ford is welcome to donate, as it didn’t receive a bunch of your money to prop it up in 2009 (though it did argue for bailing out its competitors).
These donations are part of a sort of Grand Bargain that sits none too well with pensioners who were promised a bunch of stuff politicians and union leaders knew damn well they couldn’t deliver. Pensioners, for their part, mostly gladly signed on and empowered those who kept lying to them. And, this is what it looks like when you let an entitlement crisis go this far, past the point where you could have fixed things with tweaks and small prices. This is what the bargain looked like at the beginning of the process, in February:
In the plan, which probably will be amended in the weeks ahead, police, firefighters and those departments’ retirees will take a 10% cut to their current pension payment. The pensions of all other city employees and retirees will be cut more than three times as much: 34%. Neither group will receive cost of living adjustments in the future.
The city says pension plans are underfunded by $3.5 billion, though unions dispute that number.
Bondholders can expect to receive about 20 cents on the dollar.
The plan treats pension holders better than bondholders in part because of $700 million from foundations and the state of Michigan that could be used to bolster the pension funds. That could create problems in court, said George South, a partner at DLA Piper in New York.
“There is still much work in front of us to continue the recovery from a decades-long spiral,” Detroit Emergency Manager Kevyn Orr said in a statement. “We must move swiftly to emerge from bankruptcy so that the financial distress harming the city can end.”
A Detroit Free Press editor offers some tough love on the current state of the deal, which has been bolstered by all kinds of moneyed interests (and the not-so-moneyed state) to make things easier on the retirees at risk:
And the grand bargain that has been crafted by the court is a remarkable, compassionate attempt to soften the blow to retirees. National and local foundations have put up about $400 million (spread over 20 years), the Detroit Institute of Arts will raise $100 million in the next decade, and state government will contribute nearly $200 million to backfill pension underfunding.
It is an unprecedented knitting together of goodwill, political power and finance to help save the state’s largest city.
An unprecedented kitting together which wouldn’t have been necessary if political power and union finance hadn’t been running a racket for years.
As a result, rather than getting a few dimes on the dollar like other creditors in the bankruptcy, pensioners will keep the vast majority of what they’re owed. All retirees will lose health care benefits. Police and firefighters will see their payouts maintained, though they will give up 55% of their built-in increases in the future.
The city’s other retirees will take a 4.5% cut to monthly pension checks and the elimination of cost-of-living adjustments. Because the city is attempting to recoup annuity payments that emergency manager Kevyn Orr says were inflated, retirees who have annuities will see an additional cut to monthly checks — which combine pension and annuity benefits — of up to 15.5%. The most vulnerable among them would be spared entirely, thanks to a deal with creditors that will free up cash for those who would fall below the poverty line.
Most banks, by contrast, will lose more than 50% of what the city owes them. If retirees fail to support the grand bargain, it’s likely that the outside money — unprecedented in a municipal bankruptcy — will go away. And things would get ugly. Really ugly.
Exit comment, thanks to Xzibit (with a nod to Andrew Moylan):