Detroit Pensions Should Consider Benefit Cuts, Orr Says
Detroit pension officials should consider accepting benefit reductions that fall hardest on retirees collecting the biggest checks, city emergency manager Kevyn Orr said.
The city’s plan to cut debt and exit bankruptcy ought to “keep fidelity” with a June proposal to pay bondholders and retired municipal workers about $10 billion less than they are owed, Orr said today in a phone interview. He declined to say what he has offered creditors, citing the confidential nature of the talks.
Some of Detroit’s 23,000 retirees collect pensions that exceed $100,000 a year, while the average for general city retirees is about $19,000 annually. The average pension for police and fire retirees is about $30,000 a year.
“I would hope that someone representing those people would take into account the relative capacity of beneficiaries to absorb any cuts to try to determine a way to make that as fair and equitable as possible,” Orr said.
The city’s debt-reduction plan should be based on the “sketches and concepts” in the June proposal, said Orr, who was appointed by Michigan Governor Rick Snyder in March. Unions and retirees have attacked the proposal, saying it was presented in bad faith as a ploy to justify filing the biggest U.S. municipal bankruptcy.
“If Governor Snyder and his EM wanted to protect retirees with low dollar pensions, they could have done so with an appropriate offer and good-faith negotiations before the bankruptcy proceedings were filed,” Sharon Levine, an attorney with Lowenstein Sandler LLP who represents the largest union for Detroit’s municipal employees, said in an e-mailed response to Orr’s remarks.
On Dec. 3, Detroit won the right to remain in bankruptcy while it prepares a so-called plan of adjustment to be presented to the federal judge overseeing the case. That plan may be released as early as the first week of January, unless the city and creditors are close enough to a deal to justify a delay for further talks.
Under the June proposal, about $12 billion in unsecured debt would be canceled and creditors would be given a $2 billion note that pays about 1.5 percent in interest. The $12 billion includes $3.5 billion owed to the city’s two pension systems, about $1.3 billion owed on pension obligation bonds and more than $5 billion needed to cover health care for retired city workers.
Pensioners have called the $3.5 billion figure inflated.
In his Dec. 3 ruling, U.S. Bankruptcy Judge Steven Rhodes found that the city had properly sought bankruptcy protection on July 18 and rejected arguments by unions and retiree groups that pension cuts are barred by Michigan’s constitution.
The judge also said that the city wasn’t trying to negotiate in good faith when it asked creditors to accept the June proposal before the filing. Opponents of the bankruptcy have asked Rhodes for permission to seek a quicker-than-normal appeal. Rhodes will consider the request at a Dec. 16 hearing.
“The June 14 proposal simply is not a template for a fair and equitable plan of adjustment,” Robert D. Gordon, an attorney for the city’s pension system, said today in an e-mail. “Judge Rhodes warned the city against the concept that his ruling was a license to deeply impair the accrued pension benefits of the city’s retired and active employees.”
Orr said he is making progress in improving public safety and trash pickups and removing blight, including his appointment of a blight-elimination committee that is documenting all 78,000 vacant structures in the city.
Detroit, the country’s 18th-largest city, has said it doesn’t have the money to pay bondholders, retirees and employees everything it owes them while still providing its 700,000 residents basic city services, such as ambulances and streetlights.
Orr said he remains committed to seeking quick approval of a plan of adjustment.
“Every day we’re in bankruptcy is another day we can’t provide services to the city,” he said.
The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).