Detroit bankruptcy ruling lifts pension protections

DETROIT — In a ruling that could reverberate far beyond Detroit, a federal judge ruled Tuesday that the battered city could formally file for bankruptcy and said Detroit’s obligation to pay full pensions was not not untouchable.

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

The judge clarified that public employee pensions were not protected in a federal Chapter 9 bankruptcy, even though the Michigan Constitution expressly protects them. “Pension benefits are a contractual right and have no increased protection in the event of municipal bankruptcy,” he said.

James E. Spiotto, a Chicago municipal bankruptcy attorney with Chapman & Cutler who was not involved in the case, said, “No bankruptcy court had ruled this before. It will be instructive. »

For residents of Detroit, the birthplace of Motown sound and the American auto industry, Judge Rhodes’ ruling that the city qualified for bankruptcy amounted to an expected, more miserable assessment of its sad situation. The city has lost hundreds of thousands of residents, the judge said, only a third of its ambulances are working and its police department is closing less than 9% of cases.

“This once proud and prosperous town cannot pay its debts,” said the judge, who sits in the United States Bankruptcy Court for the Eastern District of Michigan. “It is insolvent. He is eligible for bankruptcy. But it is also an opportunity for a new beginning.

Appeals had 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 also considering challenging the result. But the decision also allows Kevyn D. Orr, an emergency official appointed in March by the state to oversee Detroit’s finances, to quickly proceed with a formal restart plan – a proposal to reimburse only part of his $18 billion in debt and to restore essential services, like streetlights, to tolerable levels.

Mr. Orr said he intended to file the official plan, known as the “adjustment plan”, by the first week of 2014. That plan could include efforts to divest the services of the city to outside entities, sell city assets and reinvest in failing city services. Mr. Orr said his goal is to put Detroit, the nation’s largest city to go bankrupt, out of court proceedings by next fall.

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

Around Detroit, leaders seemed gloomy but slightly optimistic. Mayor-elect Mike Duggan said Tuesday was a day no one wanted to see, but now the city needs to move on. And Dave Bing, the incumbent mayor, whose term was consumed by financial distress, said it was inevitable that Detroit would eventually be declared insolvent. “We are now starting from square 1,” he said.

City workers and retirees said they were shaken by the developments and did not know what to expect. Any pension cuts, many said, would be crushing.

“The impact of this is going to be catastrophic on families like mine on fixed incomes,” said Brendan Milewski, 34, a Detroit firefighter who was seriously injured in an arson attack in 2010 and said he was receiving a pension of $2,800 a month from the city. . “Retirees will be driven out of their homes. They will not be able to afford a car, food or medicine.

Bruce Babiarz, a spokesman for the Detroit Police and Firefighters Retirement System, was candid in his assessment. “This is one of the strongest protected retirement bonds in the country here in Michigan,” he said. “If this decision is upheld, it is the canary in a coal mine for protected retirement benefits across the country. They left.”

Since July, Mr. Orr, with the approval of Gov. Rick Snyder, a Republican, has filed for bankruptcy protection, and most here agree the city’s situation is dire: annual operating deficits since 2008, a model of new borrowing to pay off old borrowing, drastically reduced municipal services and the allocation of approximately 38% of tax revenues to debt servicing. A city that was once the fourth largest in the country has fallen to 18th, losing more than half its population since 1950. The city was once home to 1.8 million but now has more than 700,000.

Judge Rhodes rejected arguments from 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 bankruptcy opponents that the city had failed to make “good faith” attempts to negotiate with creditors, but said such negotiations had been “impracticable.”

In perhaps the most contested part of the case, the judge made it clear that federal bankruptcy law trumps state law when it comes to protecting public employee pensions, which makes the pensions of 23,000 retirees fair 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 cautious before approving any reduction in monthly payments to pensioners.

This seemed little comfort to union leaders, who denounced the decision as illegal and immoral.

Lee Saunders, president of the American Federation of State, County and Municipal Employees, said the decision essentially put a “bull’s eye” on the backs of municipal workers and retirees by saying pensions were vulnerable. “It sets a bad precedent for economically struggling cities considering doing the easiest thing: attack workers and attack retirees,” Saunders said.

Experts said the decision appeared unlikely to cause a rush to file for bankruptcy by cities, but was likely to give cities more leverage over pensions in negotiations ahead of bankruptcies. Detroit has included $3.5 billion in unfunded pension liabilities in its largest debt mound, and city attorneys say it simply can’t pay its pension plan anymore.

For his part, Mr. Orr said he has a difficult reality to present to retirees. “There is not enough money to remedy the situation, no matter what we do,” he said. “It’s clear.” At another point he said of the pension issue: “We try to be very thoughtful, measured and human about what we have to do.”

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