Detroit Bankruptcy Judge Says Government Pensions Aren’t Protected

Published December 4, 2013

A federal bankruptcy judge has ruled Detroit may reorganize under bankruptcy law. The decision means holders of Detroit bonds could take losses, city workers and retirees could see wages and benefits cut, and other creditors could end up with pennies on the dollars owed.

Detroit has more than 100,000 creditors.

U.S. Bankruptcy Judge Steven Rhodes cleared the way for bankruptcy in a ruling issued in December, five months after the city submitted its bankruptcy filing. Unions representing city workers and retirees, civil rights activists, and others oppose the city’s bankruptcy.

The American Federation of State, County and Municipal Employees immediately filed a notice of appeal. The union says the judge’s ruling amounts to an unconstitutional attack on retiree benefits.

AFSCME attorney Sharon Levine said on CNBC, “It’s a sad day for the people of Detroit. . . . We’re going to keep fighting for the pensions, going to keep fighting for our members.”

Constitution Trumped

In his ruling, Rhodes declared pension benefits are not entitled to special protection from cuts, despite a provision in Michigan’s constitution that appears to grant such protection. Rhodes said the federal court’s power trumps that state provision.

Last summer Detroit’s emergency financial manager, Kevyn Orr, announced a plan that would leave unfunded most of the $3.5 billion the city owes to its pensions.

Speaking on local radio station WWJ Newsradio 950, Orr said, “First of all, we’re going to put out a plan of how we’re going to pay off all our creditors with money we don’t have. The reality is the city has no cash on hand to pay the magnitude of the debt we have, which is $12 billion — $5.7 billion of which has to do with health care obligations, $3.5 billion has to do with pensions, and $2 billion has to do with bondholders. So our plan is going to have to come up with a payment proposal for these creditors over a period of time,” he said.

Criminality, Malfeasance in Governance

Orr said the city’s problems have been decades in the making and still could have been managed as late as 2005 and 2006, but “there was some form of mischief going on in the leadership of the city at that time that wasn’t paying attention . . . And people have gone to jail. One of them was your mayor [Kwame Kilpatrick]; one of them is some of the counsel to the pension fund. The problem is, there was no one willing, for whatever reason, to step in and stop the behavior. Whoever did it, and I’ve stayed away from pointing blame because frankly that’s not going to help the problem, but whoever did it left us in very sad shape and now we have to deal with it.”

In a written statement issued shortly after the judge’s ruling, Orr said, “We are making good progress. In addition to today’s important decision, Detroit has transferred its electric operations and customers to DTE Energy and begun a program to improve City lighting. It has announced plans to privatize trash collection that will save $6 million a year while improving services and adding curbside recycling. It has invested in sorely needed equipment for its police, fire and other first responders.”

Orr added, “The City also has arranged, pending a court hearing later this month, $350 million of post-petition financing to improve its financial condition, lessen some of its debt obligations, and make much-needed investments. The City is also committed to the federal mediation already underway aimed at resolving disputes with its creditors and we fully support U.S. District Court Chief Judge Gerald Rosen’s efforts to find additive solutions, particularly from the philanthropic community, to the City’s financial issues.”

Cuts to Illinois Pensions, Too

On the same day Detroit’s bankruptcy filing was approved, lawmakers in Illinois passed a pension reform measure that lowers benefits for some Illinois government workers. Illinois has the lowest credit rating among the 50 states and the largest unfunded pension liability, conservatively estimated at $100 billion.

“The failure to pay for the work the government demanded of its workers is the responsibility of the taxpayers. Now, without demanding fair payment for those services, Illinois and Michigan have decided to punish the only party that fulfilled its part of the bargain—the employees and retirees who showed up, worked hard, and did the jobs they were asked to do. This is wage theft on a huge scale, and votes by the legislature or a judge’s ruling don’t make it just or palatable,” said the Economic Policy Institute, a Washington, D.C.-based policy organization that advocates for low- and middle-income workers, in a statement.

University of Michigan law professor John Pottow told The Wall Street Journal, “Unions and penson funds no longer have the magic bullet of the state constitution to protect them. And that could help push all sides into a negotiated settlement.”