Detroit bankruptcy decision puts pensions at risk

Caption
(AP Photo/Carlos Osorio)
Retiree Cecily McClellan talks to the media outside the federal courthouse in Detroit, Tuesday, Dec. 3, 2013, after Judge Steven Rhodes ruled on the city's bankruptcy filing. Judge Rhodes turned down objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.

DETROIT — A judge has given Detroit the green light to cut pensions as a way out of the largest municipal bankruptcy in U.S. history, a decision that puts the case in the laps of thousands of retirees who had hoped that the Michigan Constitution would protect them from getting smaller checks in their golden years.

Judge Steven Rhodes said the city is eligible to stay in bankruptcy court and scrub $18 billion in debt, about half of that amount linked to underfunded pensions and health care obligations. But he also warned officials that they'll need to justify any deep reductions.

The case now turns to crunching numbers and trying to strike deals, although unions are pursuing an appeal.

Some retirees said they felt socked by the outcome Tuesday.

"We'll be thrown out of our homes and starving if they seriously slash our pensions. Then they'll tell us to go to the soup lines," said David Sole, 65, who retired from the public works department in January after 22 years and whose wife also is a city retiree.

"We don't know what they are going to take," Sole said. "The judge said he would not tolerate steep cuts. What's steep?"

The judge, who wondered aloud why the bankruptcy had not happened years ago, said pensions can be altered just like any contract because the state constitution does not offer bulletproof protection for public employee benefits. But he signaled a desire for a measured approach and warned city officials that he would not "lightly or casually" sign off on just any cuts.

"This once proud and prosperous city can't pay its debts. It's insolvent," Rhodes said in formally granting Detroit the largest public bankruptcy in U.S. history. "At the same time, it also has an opportunity for a fresh start."

The ruling came more than four months after Detroit filed for Chapter 9 protection.

Rhodes agreed with unions and pension funds that the city's emergency manager, Kevyn Orr, had not negotiated in good faith in the weeks ahead of the July filing, a key condition under federal law. But he said the number of creditors — more than 100,000 — and a wide array of competing interests probably made that "impossible."

Detroit "could have and should have filed for bankruptcy long before it did. Perhaps years," the judge said.

The decision set the stage for officials to confront debt with a plan that might pay creditors just pennies on the dollar and is sure to include touchy negotiations over the pensions of about 23,000 retirees and 9,000 workers. Orr says pension funds are short by $3.5 billion; most who collect get less than $20,000 a year.

"We're trying to be very thoughtful, measured and humane," Orr told reporters. "The reality is there is not enough money to address the situation no matter what we do."

The city has argued that bankruptcy protection will allow it to help beleaguered residents who for years have tolerated slow police responses, darkened streetlights and erratic garbage pickup — a concern mentioned by the judge during a nine-day trial that ended Nov. 8.

Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city.

City truck mechanic Mark Clark, 53, said he may look for another job after absorbing pay cuts and higher health care costs. Now a smaller pension looms.

"Most of us didn't have too much faith in the court. ... The working class is becoming the have-nots," Clark said outside the courthouse. "I'm broke up and beat up. I'm going to pray a whole lot."

Marcia Ingram, a retired clerical worker, said she may need to find work but added: "How many folks are going to hire a 60-year-old woman?"

The judge spoke for more than an hour in a packed courtroom, reciting Detroit's proud history as the diverse, hard-working Motor City devoted to auto manufacturing. But he then tallied a list of warts: double-digit unemployment, catastrophic debt deals, thousands of vacant homes and wave after wave of population loss.

Behind closed doors, mediators have been meeting with Orr's team and creditors for weeks to explore possible settlements. The judge has told the city to come up with a plan by March 1 to exit bankruptcy. Orr has said he would like to have one ready weeks earlier.

The city is so desperate for money that it may consider auctioning off masterpieces from the Detroit Institute of Arts and selling a water department that serves much of southeastern Michigan.

The American Federation of State, County and Municipal Employees, which represents half of city workers, vowed to appeal.

Orr's team got "absolutely everything" in Rhodes' decision, attorney Sharon Levine told reporters, adding: "It's a huge loss for the city of Detroit."

Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. By July, Orr and Gov. Rick Snyder decided bankruptcy was Detroit's best option.

Detroit, a manufacturing hub that offered well-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million people since then.

Former hospital executive Mike Duggan takes over as mayor in January, the third mayor since Kwame Kilpatrick quit in a scandal in 2008 and the first white mayor in largely black Detroit since the 1970s.

Orr is in charge at least through next fall, although he's expected to give Duggan more of a role at City Hall than the current mayor, Dave Bing, who has little influence in daily operations.

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Associated Press writer Corey Williams contributed to this story.

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