May 22 (Bloomberg) -- The resolution of Detroit’s record $18 billion bankruptcy won’t be decided just in a hushed courtroom, but buffeted by advertisements designed to sway Michigan lawmakers and dissected at pensioners’ kitchen tables.
A group funded by the billionaire Koch brothers will attack legislators who support a $195 million state contribution toward Emergency Manager Kevyn Orr’s plan to settle the debt. The plan is also subject to direct democracy: About 30,000 retirees and employees are among creditors deciding how to vote on a nine-page, customized ballot that lets them choose between small or big pension cuts.
“There’s a gun stuck to your head,” Roderick Veil, a retired bus-system supervisor, said at his Detroit house. “You either take plan A, which is so unfair, or you take plan B, which is absolutely absurd.”
Orr’s plan would wipe out some debt and spend $1.5 billion to improve services in a city where police drive 10-year-old cars, 70,000 vacant buildings scar neighborhoods and buses sometimes don’t show up. With creditor ballots due July 11 and bills to release state money wending through the legislature, the case may be decided by fear, anger or appeals to Detroit’s greater good.
U.S. Bankruptcy Judge Steven Rhodes has allowed 110,000 creditors to vote on the plan, including the retirees. The large number of ballots makes Detroit’s case unique, said lawyer Michael Sweet of Fox Rothschild LLP in San Francisco, who’s been involved in other U.S. municipal bankruptcies. The deal also relies on 145 members of the Republican-dominated legislature, which must approve the state’s $195 million stake.
Yesterday, bills to enable the payment were passed unanimously by a House of Representatives committee. The going may get harder.
Americans for Prosperity, funded by energy executives Charles and David Koch, is planning an election-year campaign against members who vote for the deal. The money is needed to unleash another $466 million from foundations and the Detroit Institute of Arts to protect the city’s masterpieces and ease pension cuts. The pledges are the result of bankruptcy court mediation.
Detroit shouldn’t take more tax money to pay debts, and should sell its art instead, said Scott Hagerstrom, director of the Americans for Prosperity Michigan chapter in Lansing. The organization is conducting an online campaign and plans mailers and phone calls, Hagerstrom said.
“Legislators advertise themselves as being for limited government and economic liberty,” Hagerstrom said. “And they come to Lansing and turn around and vote for more money for Detroit on top of the more money it already receives. The citizens back home need to know.”
Orr and the judge have resisted attempts to strip the city of its art, which includes paintings by van Gogh, Picasso, Matisse and Rembrandt. New York-based Christie’s Inc. appraised the works bought with municipal money as worth between $454 million and $867 million.
Orr rejected a creditor offer to sell or loan the collection for $2 billion. Poly International, an auction house owned by the Chinese government, sought to buy Chinese works for $1 billion. Rhodes on May 15 denied the creditors’ request to remove as many as 3,000 pieces to assess them.
The AFP campaign “could have an impact,” said Republican Representative John Walsh, who is chairman of the committee that approved the state payment that would protect the works.
“It’s not a pleasant place to be, but do you want it to just go down the tank?” Walsh said. “That’s not a viable option.”
Even if lawmakers are swayed, creditors must come on board.
Orr reached debt-reduction agreements with some bondholders, retiree groups, employees and the city’s two pensions. Under the plan, retired police and firefighters would receive regular checks, though cost-of-living increases would be halved. General employees would have benefits reduced by 4.5 percent and lose cost-of-living allowances.
If creditors reject the plan, police and firefighter pensions would be cut 6 percent, and general-retiree pensions would drop 26 percent.
The ballots detail how much each former worker would lose. Included are 35 pages explaining the plan and a CD-ROM with more information.
American Federation of State, County and Municipal Employees Council 25, which represents about 2,000 worker and 3,000 retirees, has urged members to postpone voting because of questions about its ability to legally challenge cuts.
Don Taylor, president of the Retired Detroit Police and Fire Fighters Association, said most of his members will support the plan.
“It’s much worse if you turn it down,” he said in an interview. “Nobody knows what’s going to happen then.”
Veil, who was an Afscme member, fears he could lose his home if his $2,837 monthly pension is cut. He canceled a June vacation for his 60th birthday because of financial uncertainty. Veil said he pays $600 a month for health insurance instead of $125 he paid before a city-paid plan ended this year, plus higher co-pays and deductibles.
“We fulfilled our part of the promise,” Veil said. “We did everything we were asked to do. We supported the city, we bought homes in the city, paid our taxes. We thought our pensions were protected.
‘‘As usual, when it comes down to it, the workers have to pay the toll.’’
Orr’s plan includes $57 million to prevent retirees from falling below 135 percent of the federal poverty level, an income of $15,754 for a single person. Detroit has the highest percentage of residents in poverty -- 42.3 percent -- among U.S. cities with populations of 100,000 or more, according to data compiled by Bloomberg. Twenty-one percent of Detroit seniors live in poverty.
Gina Thompson, 56, lost her municipal job after 26 years as a counselor and now receives an $831 monthly pension. That would drop to $668 a month if creditors approve Orr’s plan, or to $481 if it’s rejected.
‘‘I’m still voting no because it says there’s no way for us to sue later,” said Thompson.
Discord doesn’t bode well, said James Spiotto, managing director of Chapman Strategic Advisors LLC in Chicago and a municipal bankruptcy specialist.
“It’s important to have buy-in,” Spiotto said in a phone interview. “Since a good number of employees and retirees live in Detroit, it’s important to get their buy-in. Otherwise, where is the recovery plan going?”
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