Detroit bankruptcy decision puts pensions at risk

Unions pursuing appeal; retirees worried "they'll tell us to go to the soup lines"
Associated Press
Dec 4, 2013

A judge has given Detroit the green light to cut pensions as a way out of the largest municipal bankruptcy in U.S. history, a decision that puts the case in the laps of thousands of retirees who had hoped that the Michigan Constitution would protect them from getting smaller checks in their golden years.

Judge Steven Rhodes said the city is eligible to stay in bankruptcy court and scrub $18 billion in debt, about half of that amount linked to underfunded pensions and health care obligations. But he also warned officials that they'll need to justify any deep reductions.

The case now turns to crunching numbers and trying to strike deals, although unions are pursuing an appeal.

Some retirees said they felt socked by the outcome Tuesday.

"We'll be thrown out of our homes and starving if they seriously slash our pensions. Then they'll tell us to go to the soup lines," said David Sole, 65, who retired from the public works department in January after 22 years and whose wife also is a city retiree.

"We don't know what they are going to take," Sole said. "The judge said he would not tolerate steep cuts. What's steep?"

The judge, who wondered aloud why the bankruptcy had not happened years ago, said pensions can be altered just like any contract because the state constitution does not offer bulletproof protection for public employee benefits. But he signaled a desire for a measured approach and warned city officials that he would not "lightly or casually" sign off on just any cuts.

"This once proud and prosperous city can't pay its debts. It's insolvent," Rhodes said in formally granting Detroit the largest public bankruptcy in U.S. history. "At the same time, it also has an opportunity for a fresh start."

The ruling came more than four months after Detroit filed for Chapter 9 protection.

Rhodes agreed with unions and pension funds that the city's emergency manager, Kevyn Orr, had not negotiated in good faith in the weeks ahead of the July filing, a key condition under federal law. But he said the number of creditors — more than 100,000 — and a wide array of competing interests probably made that "impossible."

Detroit "could have and should have filed for bankruptcy long before it did. Perhaps years," the judge said.

The decision set the stage for officials to confront debt with a plan that might pay creditors just pennies on the dollar and is sure to include touchy negotiations over the pensions of about 23,000 retirees and 9,000 workers. Orr says pension funds are short by $3.5 billion; most who collect get less than $20,000 a year.

"We're trying to be very thoughtful, measured and humane," Orr told reporters. "The reality is there is not enough money to address the situation no matter what we do."

The city has argued that bankruptcy protection will allow it to help beleaguered residents who for years have tolerated slow police responses, darkened streetlights and erratic garbage pickup — a concern mentioned by the judge during a nine-day trial that ended Nov. 8.

Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city.

City truck mechanic Mark Clark, 53, said he may look for another job after absorbing pay cuts and higher health care costs. Now a smaller pension looms.

"Most of us didn't have too much faith in the court. ... The working class is becoming the have-nots," Clark said outside the courthouse. "I'm broke up and beat up. I'm going to pray a whole lot."

Marcia Ingram, a retired clerical worker, said she may need to find work but added: "How many folks are going to hire a 60-year-old woman?"

The judge spoke for more than an hour in a packed courtroom, reciting Detroit's proud history as the diverse, hard-working Motor City devoted to auto manufacturing. But he then tallied a list of warts: double-digit unemployment, catastrophic debt deals, thousands of vacant homes and wave after wave of population loss.

Behind closed doors, mediators have been meeting with Orr's team and creditors for weeks to explore possible settlements. The judge has told the city to come up with a plan by March 1 to exit bankruptcy. Orr has said he would like to have one ready weeks earlier.

The city is so desperate for money that it may consider auctioning off masterpieces from the Detroit Institute of Arts and selling a water department that serves much of southeastern Michigan.

The American Federation of State, County and Municipal Employees, which represents half of city workers, vowed to appeal.

Orr's team got "absolutely everything" in Rhodes' decision, attorney Sharon Levine told reporters, adding: "It's a huge loss for the city of Detroit."

Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. By July, Orr and Gov. Rick Snyder decided bankruptcy was Detroit's best option.

Detroit, a manufacturing hub that offered well-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million people since then.

Former hospital executive Mike Duggan takes over as mayor in January, the third mayor since Kwame Kilpatrick quit in a scandal in 2008 and the first white mayor in largely black Detroit since the 1970s.

Orr is in charge at least through next fall, although he's expected to give Duggan more of a role at City Hall than the current mayor, Dave Bing, who has little influence in daily operations.

Comments

abigbear

The Fed’s latest Beige Book, an overview of business conditions in each of the Fed’s 12 banking districts, would seem to contradict oft-repeated claim that the shutdown hurt the economy and hindered growth.

The Fed said seven of its 12 banking districts described growth as moderate. Four — Philadelphia, Chicago, Kansas City and San Francisco — said growth was modest. Boston said its regional economy continued to expand.

Manufacturing strengthened in most districts, helped by more production of cars, trucks and high-tech products. Consumers increased their spending in most regions, and retailers were optimistic (albeit cautious) about the holiday shopping season. Five districts reported positive developments in hiring; the other seven reported little change.

Some companies in Cleveland and Chicago reported heightened levels of uncertainty due to continued debate over the federal budget. And tourist destinations in Boston, Richmond and Minneapolis reported lower traffic during that time.

In November, a measure of consumers’ confidence fell to the lowest level in seven months, a drop that came after a much bigger decline in October that was blamed in part on the government shutdown.

The declines in both months were driven by falling expectations for hiring and the economy over the next six months.

Pete

But Democrats have been in charge of Detroit for 50 years. It should be all Unicorns & Kool-Aid fountains!

topcop1991

Is it strange that every large city that has Democrats in charge are having financial problems? Buying votes with tax payer money will come back to bite you everytime! Sure they get voted in, because who wouldn't vote for Santa Claus?

There you go again

I though Obama "saved" Detroit.....that is what he said during his reelection campaign.

Contango

2012 - VP Biden: "Osama Bin Laden is dead, and General Motors is alive."

2013 - Reality: Al Qaeda is alive and Detroit is bankrupt.

Dr. Information

^Bahah how true tango…...

AJ Oliver

You righties don't get that EVERYONE'S pensions are under attack (SS, 401ks, Def Ben), all of them. When they come after yours, I hope you get as much solidarity as you are giving now. Not to confuse your ideology with facts, but here what really happened to Detroit.
http://www.demos.org/publication...

mikesee

I have invested MY OWN money into my pension and do not rely on union ponzi schemes. The numbers say it all: current number of employees in Detroit is 9,700 while the number drawing pensions is approximately 22,000. It should be obvious that this is not sustainable.

Just a snapshot into what lies ahead for America in general. Less working and more drawing benefits. Again, unsustainable.

Pete

The potential loss of any pension benefit is 100% the fault of Democrats. They controlled that city and everything involved with it for five decades. Democrats and their union backers destroyed Detroit and along with it the associated pensions.

Deflection won't work AJ. You guys have no one to blame but yourselves.

Contango

Re: "EVERYONE'S pensions are under attack,"

And who are THEY that is doin' the "attacking"?

IL & Chicago, the public worker's paradises look like to be the next shoes to drop.

ADM and others are threatening to move without tax relief.

http://articles.chicagotribune.c...

Doesn't look good for the progressives.

Retiredfirefighter

this is what happens when you let the gop run a city. They care about no one but themselves.

mikesee

Or when greedy unions force governmental entities into bad deals.

Contango

Re: "this is what happens when you let the gop run a city,"

And see what happens when the Dems and their public union cronies run a city?

They tax and spend, spend, spend themselves into default.

kURTje

Well spoken AJ. If & when it hits them, boy how they'll cry!

Contango

Re: "when it hits them,"

What about the hundreds of billions of dollars in public employee pension trusts like SERS, Calpers and Calsters kurtie?

They gonna get "attacked" and "cry" too?

It's sad about the level of financial ignorance in this county.

Dr. Information

Most republicans are smart enough to have their own money invested and not relying on someone else to take care of them. Oh the jealousy of the Dems on here is thick.

Contango

Re: "smart enough to have their own money"

I know that I've been enjoying the Fed put. :)

Lota truisms in the following:

"50 Unfortunate Truths About Investing":

http://www.businessinsider.com/5...

kURTje

"I'll tear down & build bigger barns." "Thou fool tonight thy soul shall be required." Lust for that coin pooh...yer livin forever. They taught that to you at St.Paul.....right?

Contango

Re: "Lust for that coin,"

In your crazy delusion, you did happen to notice that the topic is the bankruptcy of Detroit didn't you kurtie?

Seems like they ran outa "coin."

kURTje

Don't you know anything biblical? Geez....your SP education has failed you. Imagine you missed out on so many good things in life. Oh well that's your burden.

Contango

So delusional blather is therapy for you kooky kurtie?