Detroit's Bankruptcy Plan Reveals Fraud in Funding Pensions

By:  Bob Adelmann
Detroit's Bankruptcy Plan Reveals Fraud in Funding Pensions

During his deposition in front of Detroit's bankruptcy judge, financial manager Kevyn Orr revealed how a couple of banks and an insurance company broke the law by fraudulently funding Detroit's pensions under former Mayor Kwame Kilpatrick.

Once Kevyn Orr, Detroit’s emergency financial manager during the city’s bankruptcy, presented his “plan of adjustment” — code word for a compromise with which no one is going to be happy — criticism was most loudly proclaimed by two people who have no financial interest in the outcome: Amy Laskey, managing director at Fitch Ratings, and Matt Fabian at Municipal Market Advisors.

Under Orr’s plan, which was first presented in rough draft at the end of January, the $18 billion of unpayable debt will be written off by pensioners losing half of their promised benefits and bondholders losing 80 percent of their money. In addition, the pensioners would get their half in cash while the bondholders would get a piece of paper that promises they will be paid some time later.

Laskey said last Monday,

Any action that suggests pensions’ claims ... should be given priority [compared] to that of bondholders could establish a troubling precedent.

Fitch recognizes the delicate political situation surrounding the Detroit bankruptcy [but] as the state and the city continue down what could be a long road, actions and rhetoric that suggested bondholder rights are not an important consideration will continue to damage [the municipal bond market’s] perception of the state and its local governments.

In simple terms, if bondholders are stiffed in Detroit, that will greatly lessen their appetite for bonds backed by other cities in trouble. This will raise interest rates, hastening the demise of those already teetering on the far edge of bankruptcy.

Fabian called the plan a “cramdown” if it’s approved by U.S. Bankruptcy Judge Stephen Rhodes. And if it is, bond market representatives will “sue against this as unfair.”

Other parties at interest are the state of Michigan and the Detroit Institute of Arts (DIA). Michigan Governor Rick Snyder has offered $350 million of “state” money to help Detroit as long as these conditions are met: the art held by DIA isn’t auctioned off as part of the deal, the unions and retirees agree, the state legislature goes along with it, and those administering Detroit’s two pension plans are replaced with disinterested outsiders. Other parties to the grand bargain are private foundations, with the total bailout approaching a billion dollars.

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Photo of Detroit skyline

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