Detroit (USA)

Using Bankruptcy to Steal Pensions

10 August 2014 by Dianne Feeley


Caught between a rock and a hard place, the majority of the 32,000 Detroit city workers and pensioners did not bother to cast a vote over whether they were willing to have their pensions cut or would prefer to take their chances in court. Although the Michigan Constitution guarantees that pensions earned by government workers will not be reduced, Bankruptcy Judge Steven Rhodes ruled that bankruptcy law trumps the state constitution. Sensing that the outcome had already been decided, they sat out the election. For their part public officials and the media fell all over themselves explaining what a good deal the pensioners and current workers had been offered.

In 2013 Kevyn Orr, the Emergency Manager appointed to take over Detroit by Michigan Governor Rick Snyder, initiated bankruptcy proceedings. This, he explained, would rid the city of cumbersome debt. It meant that all “stakeholders” would have to take a haircut and that some city services would be outsourced or privatized. Each Detroit city worker with a vested pension was to vote to accept cutbacks or face even more severe cuts.

* Uniformed officers—including 3,272 police officers and firefighters as well as 9,054 retirees—who do not receive Social Security benefits and whose pension averages an annual $30,600 were asked to vote to allow their cost-of-living-adjustment (COLA) to be cut in half. If passed, the lifetime value of the pension would be reduced by 9.9%. Otherwise, Kevyn Orr would gut their COLA, resulting in an 18% loss.

* For general city retirees, whose average annual pension is $19,200, a yes vote would mean a 4.5% reduction in their pension plus the elimination of COLA. Otherwise the cuts would total 29%. There are 5,658 garbage collectors, water and sewerage workers, clericals and bus drivers along with 12,118 retirees.

The city also plans to recoup $230 million in excess interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. credited to workers’ annuity savings accounts from the General Retirement System. The maximum cut for any individual would be 15.5% although administrators predict the “average” would amount to 8.8%. Thus the average pensioner with an annuity might suffer a 13.3% loss.
The uniformed and non-uniformed workers have different pension plans, but each suffered investment losses, primarily because of the 2008 economic crisis. The plans have partially recovered, but remain underfunded since the city administration failed to transfer almost $250 million in the last 18 months. Both are, however, funded at higher levels than the state’s own pension plan.

Of those voting and turning in their ballots by July 11, 82% of the uniformed officers and 73% of the general city workers accepted the cuts. Thus they gave up the right to sue to enforce the state constitution’s pension guarantee.

Part of the bait encouraging a yes vote was an $814 million “grand bargain” contributed by foundations, corporations and $195 million from the state government. This supposedly propped up the pensions. Pension boards and public sector unions went along with the “bargain.”

Since Michigan has system whereby the state collects revenues and then returns a portion to Detroit (and other cities and counties), the short-changing by 28% over the last decade—as calculated by the Michigan Municipal League—was a factor in pushing the city toward bankruptcy.

When the state legislature agreed to providing $195 million, it also attached nine bills to constrain city officials. These install a nine-member financial oversight commission with authority over Detroit’s budget for more than a decade.

A second vote legitimated the 90% cut in health care benefits already implemented. On March 1 the city dropped a $605 a month health insurance plan ($1,834 for families) for 8,000 retirees and survivors ineligible for Medicare. It was replaced by a monthly stipend of $125-175.

The Emergency Manager Law

When Governor Snyder was elected in 2011, he quickly shepherded through the legislature an emergency manager bill that established dictatorial powers for appointed managers. In contrast to the usual legislative process, the law took immediate effect. Emergency managers were appointed to formerly industrialized areas that suffered from both capital and population flight. These included Benton Harbor, Flint, Highland Park, and Pontiac—all majority Black cities and towns with high unemployment. An emergency manager was also appointed over the Detroit school system.

Michigan residents signed petitions to put the law up for a vote; in the November 2012 election a majority turned it down in every county across the state. But within a month the lame-duck legislature responded by passing a new version, this time containing an appropriation—thereby making the law referendum-proof.

Shortly afterward the Governor appointed Kevyn Orr, a lawyer specializing in bankruptcy, Detroit’s emergency manager. He has hired a number of financial consultants, including his previous law firm, spending more than $80 million.

Currently there is a suit challenging the Emergency Manager law on two grounds: Michigan voters voted it down and therefore the second law is illegal; it also has a disparate impact on African Americans. After all, more than half of all African Americans in Michigan live in cities overseen by emergency managers.

For his part, the state’s lawyer dismissed any notion of discrimination. He argued that Michigan voters don’t pass laws, but merely elect representatives who pass the laws—snidely remarking that Michiganders aren’t like Californians.

Instead of mobilizing city workers and retirees and calling upon the community, the public sector unions never contemplated anything more than a legal challenge to the bankruptcy. Without a massive work stoppage and civil disobedience throughout the city, the bankruptcy grinds on.

However Kevyn Orr’s decision to have the Detroit Water and Sewerage Department (DWSD) turn off water for those residents more than two months’ behind in their bill sounded an alarm. Attempting to set up conditions that would be beneficial for selling or regionalizing the department, he created a firestorm. The National Nurses United called the turnoffs, averaging 3,000 a week, a public health crisis waiting to happen. Canadians organized a water caravan to the city. The UN Office of the High Commissioner for Human Rights pointed out that the mass shutoffs disproportionally impacted the poorest in the city.

At its recent national convention the American Postal Workers Union passed a resolution calling for a moratorium on water shutoffs and restoration of service. UAW Local 2865—University of California academic student workers—wrote an open letter of solidarity to those “who daily resist the logic of privatization.”

The American Civil Liberties Union and the NAACP Legal Defense and Educational Fund, Inc. wrote a nine-page letter summarizing the situation and calling for a permanent moratorium against shutoffs and a meaningful water affordability plan.

Detroit has a 42% poverty rate and an official unemployment rate of more than 14%, but the department began the shutoffs not with corporate accounts but with residential ones. Yet the Detroit Water and Sewerage Department, a public agency, is notorious for incorrect and inefficient billing procedures. While the Environmental Protection Agency’s established affordability standard for water and sewerage services is 2.5% of the median household income in a given area, Detroiters typically pay $50-70 a month. Water rates have risen nearly 120% over the last decade and are rising another 9%.

As far back as 2006 Michigan Welfare Rights Organization had proposed a water affordability plan, and the People’s Water Board, a coalition, has struggled over these issues for years.

Just as with the city budget, the water department’s financial problems are caused by a combination of less government money available for infrastructural needs and the department’s poor investment strategy. When the economic crisis hit, the department was forced to borrow more than $520 million to get out of the bind of gambling on interest rate swaps. The annual budget now consists of more spent on debt payment ($420 million) than on operating its far-flung system ($380.6 million).

Stung by the criticism, the Emergency Manager turned over the administration of the water department to Mayor Duggan on July 30. The Mayor announced he was in discussion with the water department and would come up with a new plan.

The bankruptcy continues, but for the first time Detroiters experienced solidarity from neighbors both near and far.




Dianne Feeley is a member of Detroit Eviction Defense and an editor of Against the Current, a bimonthly socialist magazine. She is a retired autoworker.

Dianne Feeley

Dianne Feeley is a retired autoworker and editor of Against the Current. She lives in Detroit.

Other articles in English by Dianne Feeley (7)

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