By Anne VanderMey and Nicolas Rapp
February 22, 2014

FORTUNE — If the hallmark of a good deal is that neither side is happy, Detroit had a real winner on its hands Friday with the city’s proposed bankruptcy restructuring.

First, pensioners were livid. Detroit proposed to pay its municipal retirees 66% of the money owed to them (or 74% if they sign onto the deal early). That drew outrage from the city’s unions, which have been fighting for workers’ pensions to be paid in full.

But those losses pale in comparison to the haircut that the bondholders would take — a proposed 20 cents on the dollar for unsecured debt. That’s better than the 10 cents on the dollar the city originally threatened, notes bankruptcy lawyer John Pottow, but it’s still a huge hit. The Financial Guaranty Insurance Company has argued that the proposal constitutes “unfair discrimination,” claiming that the “politically popular” decision to favor retirees over financial institutions would only result in “costly litigation that will hamper the city’s emergence from bankruptcy.”

The one group that may feel placated are the police and fire department retirees, who are slated to receive 90% of the money owed them (or 96% if they approve the plan early). These retirees’ pensions are higher on average than other Detroit city workers, says Michelle Wilde Anderson at the UC Berkeley School of Law. Just the same, police and fire department retirees have been among the most vocal dissenters to the proposal. The Police and Fire Retirement System Board of Trustees issued a release calling the cuts and the failure to take cost of living or inflation into account “debilitating and unnecessary.” The statement continued, “the City of Detroit can afford much better treatment of its pension beneficiaries who dedicated years of their lives in service of the city.”

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So, who has a genuine grievance, and who’s posturing? The answer is a little of both, on all sides. Every creditor has a legitimate claim to Detroit’s money. The problem is that with $18 billion in debt and precious little in revenue from a dwindling tax base, there’s not enough of it to go around. Cue a no-holds-barred assault from all sides for every penny.

With the latest plan, retiree funds “certainly have the most reason to be happy,” says Wayne State University law professor Laura Bartell. But they’re not out of the woods in terms of legal challenges from other creditors. It’s a bigger problem when you consider retirees are the ones with the least ability to pay. With the average payout at less than $30,000, “these are not rich pensions,” Bartell says.

Even worse than the proposed pension cuts, though, is the blow to health care benefits. In the plan, all pensioners who are eligible would be switched to Medicare, and those who are not eligible would receive a stipend that could be used to purchase a plan through the Affordable Care Act. Retiree groups say the stipend falls far short of what would be required to receive comparable care to what they receive under their current pension plans.

Detroit’s restructuring is being watched closely by both bond markets and other distressed municipalities’ public sector unions. Bartell thinks bond markets won’t react too dramatically to the haircut and that Detroit will still be able to borrow at affordable rates in the future. After all, post-bankruptcy, the city’s financial situation will only have improved.

As for pensioners, Detroit’s plan to pay them will be hard for other cities to replicate: Right now, a substantial chunk of the funds for pensions will actually come from nonprofits and the state, and it will be tied to the preservation of the Detroit Institute of Arts. Nicknamed the grand bargain, the tactic is “basically a strategy to draw external charitable dollars into Detroit,” Anderson writes in an e-mail.

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If the plan succeeds in some form, and Detroit emerges from Chapter 9 this year, city officials are hoping that the fresh financial start will be enough to jump-start Motor City’s long-awaited comeback. Free of mountains of debt and with a promising new mayor and $1.5 billion slated for improvements, a turnaround looks more realistic than it has in years.

That’s cold comfort for cash-strapped retirees who depend on slim pensions. But in a city with outstanding obligations that easily exceed the GDP of Jamaica, they may be forced to take what they can get. Considering Detroit’s history of financial wreckage, says Bartell, “this is a pretty good deal.”

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