"Judge Greenlights Detroit Bankruptcy, All But Guaranteeing Pension Cuts"
Detroit’s bankruptcy may proceed, Judge Steven Rhodes ruled Tuesday morning in a decision that eliminates the last, best hope retired city workers had of retaining the pensions and health care benefits they were promised. Rhodes further ruled that a provision in the Michigan constitution that protects pensions is not applicable here, wiping out the only other significant defense retirees had from cuts.
At one point in Rhodes’ hour-long reading from the bench, he warned lawyers for the city that he will not “lightly or casually” approve cuts to pensions in the final bankruptcy resolution deal. At another, he said emergency manager Kevyn Orr “did mislead the public about the status of pensions in bankruptcy.” But those gentle reprimands will provide little comfort to the city’s 20,000 retired employees who lost their last buffers against health care cuts that begin early next year and pension cuts that are likely to be severe. If the city’s retirees are to avoid cuts, it will be because of charity rather than the legal system.
Tuesday’s ruling resolves the central question in the case since Detroit filed for bankruptcy protections in July. Opponents of the bankruptcy argued the city was not eligible because emergency manager Kevyn Orr and his colleagues had never conducted good-faith negotiations with retirees and city workers. Emails from before Orr’s appointment backed the notion that bankruptcy was pre-ordained, and a week before the filing the Michigan Treasurer warned Orr and others that the bankruptcy “looks premeditated.” Judge Rhodes had to decide if that evidence and testimony from workers’ representatives was enough to prove that the city had been negligent in its responsibility to seek a negotiated solution with its creditors before it sought legal protections.
Rhodes actually sided with workers’ representatives on the question of good-faith negotiations, saying that Orr’s team never gave creditors a meaningful opportunity to negotiate. But as soon as he’d said that, Rhodes turned around and negated the good-faith question by finding that negotiations were “impractical” and doomed to failure and that the city was therefore eligible for bankruptcy despite Orr’s failure to negotiate in earnest. (Rhodes also ruled in the city’s favor on the other three pre-conditions for bankruptcy eligibility, as he was widely expected to do.)
Rhodes has cleared the way for the city to rewrite its contracts with retirees and current workers alike. Now the key questions for retirees involve math. The estimate of the pension funding gap in Orr’s bankruptcy filing appears to be seriously inflated as compared to previous findings. Orr’s figures put the gap at $3.5 billion — nearly five times larger than previously thought — but the math underlying that number has been derided as “pension voodoo” by one expert and described as “very rough preliminary guesstimates” by the firm that provided Orr with the numbers.
Tuesday’s decision means that disabled former firefighters like Brendan Milewski and David Allen and retired librarians like Gwendolyn Beasley will be forced to accept pension cuts and health care cuts that they simply cannot absorb, even though Detroit’s financial woes were not caused by retirees.
The bankruptcy process to come will pit retirees like Beasley against hedge funds and other investors to whom Detroit owes money. Many of those firms bought up Detroit’s debts for pennies on the dollar from the companies that had originally made the loans because those companies preferred to take a sure payout from hedge funds rather than risk a worse outcome in bankruptcy. Well-heeled financial advisers will be fighting the Beasleys and Milewskis of the world for the financial equivalent of table scraps.