Detroit-style pension cuts: could it happen here?

Bankrupt Detroit announced last week that current workers and retirees voted overwhelmingly to cut many pensions by 4.5 percent and to trim or eliminate cost-of-living adjustments.

If the plan to exit bankruptcy had been rejected, a federal judge might have imposed a proposed 27 percent pension cut, and a $816 million contribution to offset pension cuts would not be made by foundations, the state and art donors.

“I want to thank City retirees and active employees who voted for casting aside the rhetoric and making an informed positive decision about their future and the future of the City of Detroit,” the Detroit emergency manager, Kevyn Orr, said in a news release.

Retirees in a much smaller bankrupt city, Central Falls, Rhode Island, population 19,000, voted in 2011 to accept pension cuts of up to 55 percent, reduced for the first five years by a state supplement.

In California, pension debt is an unresolved issue in two cities that declared bankruptcy in 2012 about five weeks apart — Stockton on June 28 and San Bernardino on Aug. 1.

But the state law in California and the financial pressure on the two cities, both members of the California Public Employees Retirement System, are different from the situations in Detroit and Central Falls.

Only 27 states have laws authorizing municipal bankruptcies, a Pew Charitable Trusts report said last July. Two states, Georgia and Iowa, prohibit bankruptcies, and the rest have no law authorizing or prohibiting bankruptcies.

Michigan Gov. Rick Snyder appointed an emergency manager for Detroit finances, Orr, who proposed a 27 percent pension cut. A court-appointed Central Falls receiver, Robert Flanders, proposed pension cuts of up to 55 percent.

Elected city councils still control Stockton and San Bernardino finances. Stockton does not want to cut pensions, saying they are needed for recruitment. San Bernardino has only publicly proposed stretching out pension-debt payments to reduce short-term costs.

In addition to outside control, Detroit and Central Falls also received outside financial aid that reduced the amount of the pension cuts active and retired employees were asked to approve.

The $816 million Detroit “grand bargain” reduced pension cuts and avoided the sale of the city’s world-class art collection. Private foundations provide $366 million, the state of Michigan $350 million, and Detroit Institute of Arts donors $100 million.

The Central Falls pension cut of up to 55 percent is reduced during the first five years by several million dollars from the state of Rhode Island. Police and firefighters get 75 percent of their original pensions. Pensions of $10,000 a year or less are not cut.

“In many states, the difficulties of major cities such as Stockton and San Bernardino would mobilize the state government to intervene and help them recover,” the Pew report said last year. “But California offered no such aid, because it has long adhered to the belief that its cities should operate independently from the state.”

Because the state of California helps fund schools, a state fiscal oversight system requires county offices of education to monitor school districts, the Pew report said. For some troubled districts, the state has appointed administrators and provided loans.

Detroit retirees at rally earlier this month (AP photo/Paul Sancya)

Detroit retirees at rally earlier this month (AP photo/Paul Sancya)

U.S. Bankruptcy Judge Steven Rhodes, acting earlier than expected, ruled last December that Detroit pensions can be cut, even though the Michigan constitution says pensions are a “contractual obligation” that can’t be “diminished or impaired.”

The ruling that federal bankruptcy law allowing contract impairment overrides state law was appealed by unions. But the early ruling, along with potential loss of “grand bargain” financial aid, may have added to fear of deep pension cuts, influencing the vote.

A cut of 4.5 percent in active and retired general worker pensions and the elimination of cost-of-living adjustments was approved by 73 percent of voters. Leaving police and firefighter pensions intact but trimming their COLAs from 2.25 to 1 percent was approved by 82 percent.

In a brief supporting the appeal of Judge Rhodes’ ruling, CalPERS argued, among other things, that Detroit has a city-run plan and that an “arm of the state” like CalPERS cannot under federal bankruptcy law be impaired in a municipal bankruptcy.

The judge handling the Stockton case, U.S. Bankruptcy Judge Christopher Klein, has said one of his options is ruling on the general issue of whether CalPERS pensions can be cut without necessarily finding that Stockton pensions should be cut.

Although differing on pensions, the Detroit and Stockton plans to exit bankruptcy are similar on retiree health care. Detroit announced last week that a 90 percent cut in retiree health care was approved by 88 percent of voters.

Judge Klein ruled in 2012 that retiree health care can be cut in bankruptcy, acknowledging the result may be “tragic hardships” for some. A Stockton retiree health care debt of $544 million was reduced to a one-time payment of $5.1 million.

Another similarity is that the Detroit and Stockton “plans of adjustment” to cut debt and exit bankruptcy face challenges from bondholders. Making little or no reduction in massive pension debt, but deep cuts in bond payments, is said to be unfair.

In Detroit, a “grand coalition” of the city, retirees and major unions reportedly has formed to fight a challenge to the exit plan from two bond insurers, Financial Guaranty Insurance Co. and Syncora. A trial on confirmation of the plan is set to begin Aug. 14.

The city argues that a $1.4 billion loan in 2005 to fund Detroit pensions used bogus corporations and a third-party trust to skirt a state limit on borrowing. The bond insurers suggest that if the loan was illegal, the pension funds should return the money.

“Experts tracking the largest municipal bankruptcy in U.S. history view a potential disgorgement of the debt as a long shot — but it could be enough of a threat to nudge Detroit to strike a settlement with the insurers simply to avoid the risk,” the Detroit Free Press reported last week.

Stockton reached an agreement in closed-door mediation with three bond insurers, all city unions and other major creditors. But the city could not reach agreement with two Franklin bond funds that loaned $35 million, triggering a confirmation trial last month.

This month Judge Klein set a value of $4 million on the Franklin loan collateral, two golf courses and a park. He invited the city, CalPERS and other parties to submit briefs on how pension debt should be treated before the next hearing Oct. 1.

Stockton followed a union-backed law passed after the Vallejo bankruptcy that requires a 90-day mediated attempt to reach an agreement with creditors before filing for bankruptcy.

San Bernardino made an emergency bankruptcy filing, saying it needed an immediate stay of debt collection to make payroll. Then San Bernardino took the unprecedented step of skipping its CalPERS payments for one year.

Last month San Bernardino announced an agreement with CalPERS to pay off the debt for the skipped payments — $13.5 million, plus several million more in interest and penalties.

San Bernardino does not yet have an exit plan. U.S. Bankruptcy Judge Meredith Jury is scheduled Tuesday (July 29) to hear a firefighter union request to argue in state court that the city imposed benefit cuts that violate state labor law.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 28 Jul 14

14 Responses to “Detroit-style pension cuts: could it happen here?”

  1. SDouglas47 Says:

    Could happen. If some California city loses half its population, and tax base, they might reduce COLAs for retirees.

    Barring that, it seems California cities WANT to honor their pension commitments in order to attract and retain qualified employees. At the same time, they are continually negotiating with their employees to make sure future pensions are fair….and secure.

  2. Cyrano Says:

    The “entitled one” speaks. sooooeeee, My generation of 20 someone’s will fix this. We have no religion, we have no remorse, but we do write the code that determines who will get their medications, and who will not. There is a new Sheriff in town. Meet your new boss, not the same as the old boss. No mercy.

  3. Captain Says:

    “Detroit-style pension cuts: could it happen here?”

    Why not? Given the amount of abuse & corruption at the hands of the Pension Plan administrators (CalPERS, CalSTRS, and the County Pension plans), the Public Employee Unions, our state politicians, our local elected representatives, as well as the membership/beneficiaries, I see absolutely ZERO justification for protecting these excessive pension payouts at the expense of taxpayers, services, the real middle class, or our children’s education.

    Has anyone noticed how many taxes and fees are being force-fed down the publics/middle class taxpayer’s throat to sustain the unsustainable? God forbid any money is left over for infrastructure maintenance and repair. Why fix it if nobody can see it … until it’s broken, and then claim we have an immediate emergency (thirty years in the making mind you) which will require a sales tax increase (or some other tax/fee increase), because we’re all in this together. To that I’ll politely say – BULL CRAP! How is anything ever going to get fixed when ALL the tax & FEE increases go toward paying UNAFFORDABLE EMPLOYEE Contracts and rapidly RISING PENSION & HEALTH CARE BENEFITS?

    The Detroit unions screwed their own tax base and there’s nothing different about what’s happening in California – except that in California it’s happening on a much grander scale!

  4. Captain Says:

    Our state and Local Democratic politicians (I’m a former democrat) have promised the Public Employee Unions hundreds of billions in deferred compensation while at the same time cutting/deferring funding for social services, road repair, and other CORE infrastructure costs. That leads me to…

    The lead story in yesterday’s news was that 1 million gallons in water-starved L.A. were lost due to a rupture in a 93 year old water main under Sunset Blvd, causing additional yet to be calculated dollars in damage to the UCLA campus and surrounding areas. According to the news report, L.A. officials were going to investigate the cause of the rupture.

    REALLY?

    Could it possibly have anything to do with the deferral of maintenance costs to every part of the Los Angeles city infrastructure? Would people be surprised to learn tax dollars meant to maintain the city’s infrastructure have been/continue to be deferred to fund payroll costs, pension costs, and health care costs the city can’t afford. With the city’s neglected infrastructure continuing to deteriorate/age this incident is hardly isolated.

    “According to the news report, L.A. officials were going to investigate the cause of the rupture.” Instead of investigating why a 93 year old water main ruptured, L.A. officials should investigate why a 93 year old water main has been neglected for so long. How many other 93 year old water mains are ready to fail because money meant to pay for infrastructure improvements has been diverted to pay for employee compensation, pensions, and healthcare benefit’s the city could never afford.

  5. SDouglas47 Says:

    REALLY???

    The unions did it??

  6. SeeSaw Says:

    First, it was 20 million gallons of water lost–a disaster on several levels–but thank-god nobody died.

    You don’t fix infrastructure without labor, so Captain you need to stop putting the cart before the horse. Maybe you should consider that we need to pay a few more taxes so that there will be money to fix the infrastructure after the workers have been hired.

  7. Captain Says:

    Seesaw, our cities infrastructure will continue to deteriorate as long as funding is divereted from services in order to pay for bloated/bloating pension costs.

  8. Captain Says:

    SDouglas47 Says: REALLY??? The unions did it??

    -The clarity of your comments continues to deteriorate/make less sense. Nothing coherent to respond to in your last several comments.

  9. SDouglas47 Says:

    Your obsession is blinding you. And boring the rest of us.

    “Powerful Public Employee Unions” is an oxymoron. Business and corporate interests outspend unions by as much as fifteen to one.

    California has fewer government workers per capita than all but four other states. In per capita public sector wage and benefits costs as a percent of state income, California ranks 35th in the nation. Well below average.

    Most studies say public sector workers earn “about the same” as equivalent private sector workers in total compensation. The most conservative studies claim that with “correct accounting” of pension and retiree healthcare, the average public workers earn more, but even those studies show that many of the highest educated and professional public workers earn up to 38% less in “cash pay” and seventeen percent less in total compensation.

    Public sector unions are not the cause of leaking ninety year old pipes, plummeting house values, or teenage acne.

    REALLY!!

  10. Captain Says:

    Public employee union members do receive pay beyond what the private sector can afford, excessive paid leave which also leads to excessive hours paid at time and one-half, and an exception to the overtime rules that every private sector employee adheres to.

    Why do Public Employee Union Members have an exception to the overtime rules everyone else adheres to? Why are they receiving up to 70 percent of pay toward their pensions? Why do they get more paid sick time, vacation time, Holiday pay than the people footing the bill?

    SDouglas47, you can take your attitude and shove it up your ego! Your pension plan is ABSOLUTELY the most egregious scam ever shoved down the taxpayers throat. I think, deep down, we both agree that that a defined contribution plan is the only plan that will survive.

    CalPERS is CORRUPT to the POINT of acting like the MOB. The cost CalPERS is charging their members is way beyond obscene. CalPERS needs to be split into 13 pieces.

  11. SDouglas47 Says:

    Start with this one:

    Q. ” Why do they get more paid sick time, vacation time, Holiday pay than the people footing the bill?”

    A. Why do gullible saps believe everything they hear from Sean Hannity and his ilk???
    ……………….
    From the American Enterprise Institute state by state ranking of public employee compensation:

    “Paid leave encompasses sick time, vacation days, paid holidays, and personal leave. On average, paid leave is almost precisely the same in the private sector as in state government, with values of 11.11 percent and 11.06 percent of wages respectively. There are variations from region to region, with some governments providing more paid leave than private employees and others less. Overall, however, differences between the public and private sector are quite small relative to other fringe benefits. It is unusual for the value of state and private leave to differ by more than 1 percent of wages.”

    The Bureau of Labor Statistics has similar data, but they calculate it as a percentage of total compensation (7.0% vs 7.3%), rather than a percentage of wages.

    It is quite probable that many of your other “facts” are as mistaken as this one.

    MY attitude???

    REALLY???

  12. SDouglas47 Says:

    And this one:

    Q. ” Why do Public Employee Union Members have an exception to the overtime rules everyone else adheres to?”

    A. MOST Public Employee Union Members , in my experience, work very little, or no overtime. Many of us in maintenance were subject to emergency calls on nights and weekends, or extension of shift to clear accident damage and keep traffic moving. We were paid time and a half for any time over forty hours in a week. As far as I know, it was the same rules as when I worked the private sector.

    You may be referring to OT rules for safety. Police, fire, prison guards, etc. usually have odd shifts for 24/7 coverage, and I would assume they have evolved OT rules to accommodate that. It ain’t 9 to 5 assembly line work.

    I do know some private companies negotiate improved OT, like time and a half for over eight hours and double time for over twelve hours. And double time, or more, for holidays.

    Really

  13. SDouglas47 Says:

    This one?

     “I think, deep down, we both agree that that a defined contribution plan is the only plan that will survive.”

    We do not agree, really.

  14. SeeSaw Says:

    There was an exception where I worked–I did not get overtime, and there was a limit of 40 hours/year on comp-time.

    (At least the public sector does enforce overtime rules that are in its MOU’s. My spouse worked as a carpenter–was in the union until the illegals took over and killed it. The union, when it was surviving, had overtime rules in its MOU with the builders, but the builders did not pay the overtime, and any worker who complained was out of a job.)

    If a DC plan were the only plan that could survive in the public-sector, you would see dependency on Social Services, and, therefore, your taxes increase in multiples! An individual would need to save about two million dollars in a DC, only, plan–how many could ever do that? I saved in my supplemental DC plan like clockwork–gave it 20% of every payckeck. Now in retirement, I draw out one thousand dollars a month–not even enough to pay for the ABC medical insurance premium!

    Get smart Captain–join the middle class and stop pandering to the rich with your naivete!

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