DETROIT (AP/WWJ) — Workers and retirees approved pension cuts in Detroit’s bankruptcy, the city announced Monday, a crucial step to emerging from the largest municipal insolvency in U.S. history.
The city reported results from two months of balloting, which ended July 11. Judge Steven Rhodes still must hold a trial in August to determine if Detroit’s overall bankruptcy plan is fair and feasible to all creditors, from Wall Street to Main Street, but support from retirees is vital.
“It’s clearly a victory for the city,” said Anthony Sabino, a bankruptcy expert who teaches business law at St. John’s University in New York. “It will pave the way for a confirmation hearing. Detroit will be able to move forward, not with absolute financial certainty but far more than Detroit has enjoyed in decades.”
General retirees would get a 4.5 percent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose a portion of their annual cost-of-living raise.
Ballot approval of the pension changes triggers an extraordinary $816 million bailout from the state of Michigan, foundations and the Detroit Institute of Arts. The money would prevent the sale of city-owned art and avoid deeper pension cuts. The judge, however, still must agree.
“It’s absolutely unprecedented in a bankruptcy,” Sabino said.
There are tens of thousands of creditors in Detroit’s $18 billion bankruptcy, from bond holders to businesses that provide soap, but much of the focus of the last year has been on the roughly 30,000 retirees and current and former workers banking on a pension. They have put a real and often anguished face on the process.
Ryan Plecha with Lippitt O’Keefe Gornbein, PLLC, represents the Detroit Retired City Employees Association and the Retired Detroit Police and Firefighters Association and said that the vote is just one of many steps that the city has to take to recover from bankruptcy.
“It’s definitely good news as it relates to the Grand Bargain,” Plecha said. “I know that there is a lot of retirees that don’t believe that this is a good deal, but the overwhelming turnout, that the vote shows that the retirees wanted to protect themselves from further harm.”
The average annual pension for police and fire retirees is $32,000, while most other retired city workers get $19,000 to $20,000. Detroit emergency manager Kevyn Orr said pension changes are unfortunate but necessary because two pension funds are underfunded by billions. If investment performance improves in the years ahead, he said, the cuts could be restored.
Plecha said that there could be some issues coming up next in the next few steps that the city may take.
“There’s still going to be a confirmation trial where the city will have to prove that the plan is feasible, as well that it’s fair and equitable,” Plecha said.
Plecha expressed that even though pensioners are not trilled about having to take part in the cuts, that the response has been generally positive.
“There was an understanding that what could come from a “no-vote” and a cram down scenario was exponentially worse,” Plecha said.
The Michigan Constitution says public pensions can’t be cut, but Rhodes, in his most significant decision in the case, said in December that federal bankruptcy law trumps that shield. It was a groundbreaking opinion that could influence local governments across the country that go broke.
“I just think that this is a momentous point in the bankruptcy process,” Plecha said. “But, it’s only one piece of the puzzle and there’s still more to be placed together before the city can exit bankruptcy and rebuild and there’s still challenges to ensure that the retirees are protected from additional harm.”
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