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By December 4, 2013 Read More →

What the Detroit decision could mean for you

Members of the Detroit Police Officers Association have fought the good fight trying to keep their citizens safe and protect their pay and benefits. The decision from a federal judge ruling that pensions to retirees could legally be drastically cut, has them reeling.

Members of the Detroit Police Officers Association have fought the good fight trying to keep their citizens safe and protect their pay and benefits. The decision from a federal judge ruling that pensions to retirees could legally be drastically cut, has them reeling.


One of the services PubSecAlliance can provide to you is coverage and analysis of complicated issues impacting law enforcement unions and associations in English speaking countries around the world. Today we have compiled some news articles we thought were intelligent coverage of the disastrous decision yesterday by a federal judge allowing the City of Detroit to move ahead with bankruptcy and drastically reduce the pensions of retired city employees.

Best overview of the decision
December 6, 2013
New York Times
Detroit Ruling on Bankruptcy Lifts Pension Protections

(Also pasted below because it’s hard to get into the New York Times without a paid subscription to print version.)

This article cuts to the heart of the decision in terms of its impact on retired police, fire, teachers and others  – a federal judge has ruled that a city could enter bankruptcy and that public employee pensions were not protected  – even though the Michigan Constitution expressly protects them. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” the judge ruled.

The judge, Steven W. Rhodes, dealt a major blow to the widely held belief that state laws preserve public pensions, and his ruling is likely to resonate in Chicago, Los Angeles, Philadelphia and many other American cities where the rising cost of pensions has been crowding out spending for public schools, police departments and other services.

The New York Times
Detroit Ruling on Bankruptcy Lifts Pension Protections

For people in Detroit, the birthplace of the Motown sound and of the American auto industry, Judge Rhodes’s decision that the city qualified for bankruptcy amounted to one more miserable, if expected, assessment of its woeful circumstances. The city has lost hundreds of thousands of residents, the judge said, only a third of its ambulances function, and its Police Department closes less than 9 percent of cases.

“This once proud and prosperous city can’t pay its debts,” said the judge, who sits in United States Bankruptcy Court for the Eastern District of Michigan. “It’s insolvent. It’s eligible for bankruptcy. But it also has an opportunity for a fresh start.”

Appeals were expected to be filed quickly. At least one union filed a notice of appeal on Tuesday, and other unions and pension fund representatives said they were considering contesting the outcome as well. But the ruling also allows Kevyn D. Orr, an emergency manager assigned in March by the state to oversee Detroit’s finances, to proceed swiftly with a formal plan for starting over — a proposal to pay off only a portion of its $18 billion in debts and to restore essential services, like streetlights, to tolerable levels.

Mr. Orr said he intended to file the formal blueprint, known as a “plan of adjustment,” by the first week of 2014. That plan could include efforts to spin off city departments to outside entities, to sell city assets and to reinvest in failing city services. Mr. Orr has said his goal is to bring Detroit, the nation’s largest city ever to find itself in bankruptcy, out of the court process by next fall.

“We have some heavy work ahead of us,” Mr. Orr said Tuesday.

Around Detroit, leaders sounded somber but mildly hopeful tones. Mayor-elect Mike Duggan said that Tuesday was a day no one wanted to see, but that the city now needed to move forward. And Dave Bing, the departing mayor, whose tenure in office has been consumed by the financial distress, said it was inevitable that Detroit would ultimately be found insolvent. “We are now starting from Square 1,” he said.

Municipal workers and retirees said they were shaken by the developments, and unsure what to expect. Any cut to pensions, many said, would be crushing.

“The impact of this is going to be catastrophic on families like mine on fixed income,” said Brendan Milewski, 34, a Detroit firefighter who was seriously injured in an arson in 2010 and said he received a pension of $2,800 a month from the city. “Retirees are going to be put out of house and home. They’re not going to be able to afford a car, food or medicine.”

Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, was blunt in his assessment. “This is one of the strongest protected pension obligations in the country here in Michigan,” he said. “If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone.”

Since July, Mr. Orr, with approval from Gov. Rick Snyder, a Republican, has sought bankruptcy protection, and most here agree that the city’s situation is dire: Annual operating deficits since 2008, a pattern of new borrowing to pay for old borrowing, miserably diminished city services, and the earmarking of about 38 percent of tax revenues for debt service. A city that was once the nation’s fourth largest has dropped to 18th, losing more than half of its population since 1950. The city was once home to 1.8 million people but now has closer to 700,000.

Judge Rhodes rejected arguments by unions and other opponents that the bankruptcy filing was the result of secret and unconstitutional decisions made by Mr. Snyder and others. He agreed with opponents of the bankruptcy that the city had failed to make “good faith” attempts to negotiate with creditors, but said that such negotiations had been “impracticable.”

In perhaps the most contested portion of the case, the judge made it clear that federal bankruptcy law trumps the state law when it comes to protections for public employees’ pensions, making the pensions of 23,000 retirees fair game for the city to include in its plan of adjustment. But while the judge said pensions could not be treated differently from other unsecured debt, he said the court would be careful before approving any cuts in monthly payments to retirees.

That seemed to be of little comfort to union leaders, who denounced the ruling as illegal and immoral.

Lee Saunders, the president of the American Federation of State, County and Municipal Employees, said the ruling, in essence, put a “bull’s eye” on the backs of municipal workers and retirees by saying pensions are vulnerable. “It sets a bad precedent for cities that are under economic distress to look at doing the easy thing: to attack the workers and attack the retirees,” Mr. Saunders said.

Experts said the decision seemed unlikely to prompt a rush of bankruptcy filings by cities, but was likely to give cities more leverage over pensions in negotiations before bankruptcies. Detroit has included $3.5 billion in unfunded pension liabilities in its larger mound of debt, and city lawyers say it can simply no longer afford its pension plan.

For his part, Mr. Orr said he had a difficult reality to present to retirees. “There’s not enough money to address the situation no matter what we do,” he said. “That is clear.” At another point, he said of the pension question, “We’re trying to be very thoughtful, measured and humane about what we have to do.”

Monica Davey and Bill Vlasic reported from Detroit, and Mary Williams Walsh from New York. Steven Yaccino contributed reporting from Chicago.

This article has been revised to reflect the following correction: Correction: December 3, 2013

Because of an editing error, an earlier version of this article misstated the status of Mike Duggan. He is mayor-elect, not mayor of Detroit, which is Dave Bing, who leaves office at the end of the year.

Implications for other cities
The New York Times
December 6, 2013
Pension Ruling in Detroit Echoes West to California

The article provides a frightening analysis of what the Detroit ruling could mean for other US cities who are bankrupt or teetering on bankruptcy and never considered cutting pension payments to their retirees but now they might.

Pension Ruling in Detroit Echoes West to California

The ruling by Judge Steven W. Rhodes, who is presiding in Detroit’s bankruptcy case, that public pensions are not protected from cuts could alter the course of bankrupt cities like Stockton and San Bernardino, Calif., that had been operating under the assumption that pensions were untouchable.

Stockton’s bankruptcy case, for instance, is further along than Detroit’s, and until the Detroit decision it seemed likely to leave public pensions fully intact. Stockton sought bankruptcy protection last year and has already filed a plan of debt adjustment with the bankruptcy court in Sacramento. Its plan, which is subject to court approval, would leave city workers’ pensions unchanged: They would continue to accrue benefits at the same rate as they did before the bankruptcy. (A new state law does permit Stockton to provide smaller pensions to workers hired after Jan. 1.)

That is a better deal than workers at bankrupt companies often receive. City leaders based it on the thinking that public workers had already sacrificed enough, given that the plan of adjustment already calls for them to give up contractual pay increases and valuable retiree health benefits.

Opponents of that plan have raised concerns that it would not save enough money. They point to the city of Vallejo, Calif., which spent three years in bankruptcy, emerged in 2011 without touching its workers’ pensions, and is again having trouble balancing its budget. Many cities in California are struggling with pension costs because of a big benefit increase in 1999 that has been much more expensive than anticipated. State laws make it hard for cities to raise taxes enough to keep up with the costs, and because pensions are considered untouchable, local officials have had to reduce services, like policing, to balance their budgets.

Some say the situation is unsustainable. Last month, another city, Desert Hot Springs, said that its pension costs were unaffordable and that it might have to declare bankruptcy.

Early in Stockton’s bankruptcy, several financial institutions tried to block its case, arguing that it had not negotiated as required with the California Public Employees’ Retirement System, known as Calpers, which administers pensions for many municipalities. Those motions were denied, and in the months since then, all but one of the institutions have reached settlements with the city and stopped arguing about pensions.

The one remaining creditor is Franklin Templeton Investments, a mutual fund company that holds about $35 million worth of Stockton’s bonds. Stockton’s plan of adjustment proposes to give Franklin less than a penny on the dollar for its bankruptcy claims, according to court filings. Federal bankruptcy law allows for such “cramdowns” — deals that force big losses on unwilling creditors — but for a cramdown to be approved by a bankruptcy judge, it must meet certain requirements. It must be “fair and equitable,” for example, and it must not discriminate against one creditor in favor of others.

Even before Tuesday, Franklin was warning that it would challenge to Stockton’s plan. Documents on file with the court suggest it was planning to argue that no plan could be “fair and equitable” if Calpers were paid in full while Franklin received less than a cent on the dollar.

“Their argument just got strengthened,” said Karol K. Denniston, a bankruptcy lawyer at Schiff Hardin in San Francisco who has been advising a taxpayers group that formed after Stockton declared bankruptcy. Referring to the judge’s decision in Detroit, she said, “Franklin Templeton is going to have a lot to say about this ruling.”

Another bankrupt city in California, San Bernardino, has taken a different tack from Stockton. It wants to reduce its pension obligations in bankruptcy and has already stopped sending its regular contributions to Calpers. That is something a company in Chapter 11 bankruptcy would normally do, but Calpers is fighting the move in San Bernardino’s Chapter 9 case. It argues that the city does not sincerely wish to adjust its debts, as required by bankruptcy law, but simply wants to “languish” in court. Calpers maintains that pensions cannot be reduced in California and that the only way for a city to freeze its plan is to pay a giant fee.

So far, San Bernardino’s bankruptcy judge, Meredith A. Jury, has ruled against Calpers and refused to grant it an expedited appeal to the United States Court of Appeals for the Ninth Circuit. The city’s creditors are now trying to come up with a settlement plan in mediation.

“This gives them clarity,” Ms. Denniston said. “It changes the dynamic at the negotiating table in a major way, because we’ve now had a bankruptcy judge say you can impair pensions. We’re going to go through a huge period of uncertainty because that’s going to be appealed, but for right now, that’s the law.”

Judge Rhodes’s decision in Detroit’s bankruptcy case was also noteworthy for what it did not say: It did not offer specific instructions for how large or small any pension cuts should be. Instead, he said the question should be resolved in mediation, which is already running in Detroit but has so far borne little fruit.

James E. Spiotto, a bankruptcy lawyer at Chapman & Cutler in Chicago, said officials in other cities might want to change course now if they worried that they might have promised more than they could deliver.

“If you’re not able to pay, the best thing to do is address it now,” Mr. Spiotto said. “Pay as much as you can without adversely affecting the future of the city.”

James E. Spiotto, a lawyer with the firm Chapman & Cutler in Chicago who specializes in municipal bankruptcy and was not involved in the case, said: “No bankruptcy court had ruled that before. It will be instructive.”

Bankruptcy could make things worse
Detroit allowed to proceed with cuts after judge rejects attempt by pension funds and unions to have bankruptcy action thrown out
The Guardian (UK newspaper)
December 4, 2013

This article has some interesting information about what the bankruptcy could mean for Detroit’s financial future. Here’s a few sentences from the article.

“Jim Spiotto, head of the bankruptcy at Chapman & Cutler, said chapter 9 bankruptcy had always been the last resort for major US cities. New York, Cleveland and Pittsburgh have all teetered on the edge on bankruptcy in the past but all found alternatives to declaring bankruptcy, he said.

“Chapter 9 is rarely used and the only one of any real size is Detroit,” he said. “The complexity, expense and uncertainty of these types of filings make them very unattractive.”

Spiotto said that the stigma that bankruptcy causes in capital markets when the city comes to borrow money again would have very real consequences for Detroit. “If you pay 2% more interest for 30 years, that’s 60% more money that you are not spending on employing people, infrastructure. It’s a very expensive business,” he said.

In the long-term he said Detroit, like New York and Pittsburgh before it, needed to come up with a plan to grow its revenues. “Bankruptcy does not solve systemic problems it just brings the debt down to levels that are manageable. The recovery plan has to be about bringing new investment to Detroit, getting good salaries for new workers, creating a new tax base for the city,” he said.

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