$350 million offer by the state to end bankruptcy in Detroit isn’t a bailout
Posted by Miranda Owen at January 27th, 2014
Rick Snyder, the governor of Michigan offered $350 million over a period of 20 years to cushion at-risk pensions for about 24,000 retirees in Detroit with high hopes of accelerating the trip of the city through bankruptcy. The proposed settlement that was insisted by Snyder wasn’t a bailout. It rather matches a $330 million pledge by a bizarre coalition of private foundations to try to assist at least some of the retiree benefits while safeguarding the prized artwork of the city from being auctioned. Kevyn Orr, the Emergency Manager of Detroit has offered to sell some of the collections of Detroit Institute of Art to help pay off $18.5 million in debt, which includes about $3.5 billion as unfunded pension liabilities.
The actual fact is that this money of the state won’t make retirees whole but it will considerably reduce the burden that they would otherwise have to face. According to the governor, the money would come from the tobacco settlement funds and would be conditional on transforming control of Detroit pension funds to an independent fiduciary board. The foundations, include the New York-based Ford Foundation and Michigan’s Kresge Foundation said that their pledge is worthy only if the DIA becomes an independent non-profit entity, separate from the city.
This deal has still not been sold to the outsiders, who have been hostile towards this debt-stricken city in the past. But the governor always thought that a strong Michigan would indeed need a strong Detroit. Did anyone of us travel anywhere and require answering questions about this bankruptcy? This is a chapter that the people of the nation didn’t want to go through but after 60 years of inaction, the sooner the bankruptcy case is resolved, the better it will be for everyone. In fact, it will be better for the Republican governor too. Snyder, who stood for the reelection in the month of November, faced a lot of pandemonium among the city’s Democratic residents (the Blacks) after bringing into action an unelected emergency manager and then pushing it into bankruptcy. Now when the city worker’s pension is being protected and speed up a deal with the creditors, he might be able to salvage a goodwill before the election.
Snyder has reportedly said that this is a settlement and not a bailout and while he said this, he was flanked by state Senate Majority Leader Randy Richardville and Jase Bolger, the House Speaker and they both expressed their immense support for their deal. The announcement follows on the heels of $330 million in commitments from different philanthropic organizations that have been pledged during the mediation process of Detroit’s bankruptcy, although the details were scarce due to some confidentiality requirements. This step isn’t geared towards the bondholders, banks or people on Wall Street and Snyder argued that the significant contribution of resources could help solve the problem of Detroit on how to minimize the impact for lower-income retirees.
He also called for different conditions that Detroit should meet to receive the money, including reaching an official bankruptcy agreement. Both houses of Michigan’s legislature are actually controlled by Republicans, who may see the idea of bailing out Detroit in any way is going to be a tough sell. Some of the Republican lawmakers in Michigan are already speaking of their disapproval for sending any aid that would come in Detroit’s way. Sen. Patrick Colbeck should not be targeting bailout for Detroit otherwise we would just reward bad behavior. Despite Detroit’s face, the lawmakers won’t cut off the noses of the taxpayers, but the taxpayers shouldn’t also be made a bad investment.
In a nutshell, this news is certainly good news for the residents of Detroit and this could also mean progress towards a debt restructuring settlement between the creditors, the retirees, the unions and the city, thereby accelerating the city’s exit from bankruptcy.