June 18 (Bloomberg) -- Detroit Emergency Manager Kevyn Orr's proposal to cut pension benefits previously thought sacrosanct for 30,000 workers and retirees may tip Detroit into bankruptcy if unions don't play along.
Getting dispassionate bondholders to take partial payment will be easier than wresting retirement cuts from unions, said Ken Schneider, a Detroit bankruptcy lawyer. He said Orr’s June 20 meeting with unions and creditors meant to frame negotiations over $17 billion in debt and obligations may presage the largest U.S. municipal bankruptcy.
“It’s one thing for union leaders to say, ‘This was forced on us by a court,’ and something else to say, ‘We agreed to this,’” Schneider said in a telephone interview. “That’s a harder sell to your members.”
Orr’s plan will test retirees’ contention that Michigan’s constitution protects vested pension benefits. No such shield exists, the state-appointed manager’s advisers said June 14 when they unveiled his plan to restructure Michigan’s largest city, a former auto-manufacturing powerhouse that lost one-quarter of its population since 2000. Orr has said that if he doesn’t get what he wants, Chapter 9 bankruptcy would be a last resort.
Detroit missed a $39.7 million payment on debt issued to bolster its pensions that was due June 14, its first failure to repay bondholders. The city has about $1.5 billion of such obligations, which Fitch Ratings cut yesterday to D, its lowest credit grade.
Orr’s plan would pay creditors no more than 10 cents on the dollar for $2 billion in unsecured debt, and the same for unfunded pension liabilities that Orr estimates at $3.5 billion -- an inflated figure, said Bruce Babiarz, a spokesman for the police and firefighter fund. The result would be an unspecified cut in benefits, which the funds are girding to fight in court with $5 million they’ve set aside.
Should Detroit wind up in Chapter 9, federal law may trump Michigan’s, said Dale Ginter, a Sacramento, California, lawyer who represented retirees who worked for bankrupt Vallejo in that state, and has studied the issue. One of the biggest fights would be over whether bond obligations and debt owed to vendors has more protection than pension claims, said bankruptcy lawyer James E. Spiotto, a partner with Chapman and Cutler LLP in Chicago.
Reducing benefits would be “heartbreaking,” said Chet Kulesza, of Detroit’s Police Labor Council, which represents civilian employees.
“You have people who are 75 years old and they’re used to getting a pension, and they’re going to cut it,” Kulesza said after hearing Orr’s presentation last week. “You have people paying a penalty for something they are not responsible for.”
Brendan Milewski, 34, retired as a firefighter with paralyzing injuries after a wall collapsed on him while he fought a building blaze in August 2010. Milewski said he receives $2,800 a month for his 12 years on the force.
Milewski said he and his wife, Angie, 30, have delayed plans for children because of uncertainty about his income. Milewski said firefighters face danger and family strains other workers don’t.
“That pension at the end of the tunnel, that bred loyalty for guys to stick around,” he said.
Union battles have played a role in three of the four biggest municipal bankruptcies filed since 2008. That year, Vallejo sought court protection after unions rejected wage cuts.
The onetime U.S. Navy town of about 120,000 on San Francisco Bay imposed new contracts on workers, cut its police force and eliminated medical benefits for retirees.
Last year, Stockton and San Bernardino in California filed bankruptcy, citing pension and other labor costs. Both cities have demanded that workers pay more toward their pensions.
“Bankruptcy has not been a panacea for labor unions,” Ron M. Oliner, a lawyer who represented the police union in Vallejo. “It is hard to fathom a circumstance where Detroit’s unions would not want to negotiate in an effort to avoid a filing if possible.”
Milewski, the firefighter, said the city should take care of those who sacrificed for it.
“For years we kept saying they can’t, they can’t, there’s no way they can cut us as retirees, and take away money these guys earned in a career,” Milewski said. “It’s so disheartening, and not just in my situation, where I lost the use of my legs in the line of duty.”
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