Pensioners Face Betrayal in Detroit’s Bankruptcy Push

Credit: Abayomi Azikiwe

(WOMENSNEWS)–The financial security of 20,000 retired city workers in Detroit, many of them low-income women, will be on the line when lawyers for the city and municipal unions appear before Federal Judge Steven W. Rhodes Sept. 18 to argue whether pensions can be reduced as part of Detroit‘s Chapter 9 bankruptcy.

Retirees like Rose Roots, a former jobs-training specialist, view the city’s plan to back away from its pension obligations as a betrayal.

“For 29 and a half years, I worked diligently and fulfilled my part of the bargain so it is unconscionable for the city to turn its back on me now,” said Roots, president of the American Federation of State, County and Municipal Employees, City of Detroit, chapter 85.

The average pension benefit in Detroit is $19,000, compared to a national average of $30,000, reports the Center for Retirement Research at Boston College.

Although modest, the benefit is a lifeline for many retirees, Roots said in a phone interview. “Some of the 800 members of our chapter are over 100 years old and are barely surviving on $400 a month because they retired decades ago and earned low wages.”

Roots warns that many retirees–especially women who live longer and have fewer assets than do men–will be unable to afford basic necessities like food and a roof over their heads if pensions are decreased.

She added that family members will suffer too; many retirees are raising grandchildren or caring for an ill spouse or disabled relatives.

The greatest injustice, Roots says, is the proposed cut in health insurance for retirees. “Many people went to work for the city because they wanted to have the security of health insurance in their old age. Now their safety net is being ripped away at a time when they need health care the most.”

Historically, state and local public sectors have provided more opportunities for women than the private sector.

In 2011, women accounted for almost 60 percent of employment in state and local governments, which was significantly higher than the nearly 47 percent share of private sector employment, the Washington-based Economic Policy Institute reports. Among state and local government employees, women, on average, earned almost 21 percent less than male counterparts.

Detroit‘s filing for bankruptcy on July 18 was the largest of any city in the nation’s history.

Amy Norris is a spokesperson for the California Public Employees’ Retirement System (CalPERS), located in Sacramento, and has more than 1.6 million members and more than 3,000 public agency employers.

“Although municipal bankruptcies have been around since the 1930s, the numbers have escalated in recent years, as municipalities have struggled with the loss of manufacturing jobs, the housing bubble and declining tax revenues,” she said in a phone interview.

In addition to Detroit, San Bernardino and Stockton, Calif., 33 cities, counties and districts have filed for bankruptcy protection since 2010. More impoverished municipalities struggling with pension obligations may initiate proceedings if Detroit‘s restructuring plan survives its court challenge.

Unions Say Pensions Protected

Facing an estimated $18 billion in debt and a budget deficit of $300 million, the city claims that it cannot pay the $3.5 billion pension shortfall. The unions contend that pensions are protected by Michigan‘s constitution, which stipulates that pensions “shall not be diminished or impaired.”

Pension benefits are guaranteed in full according to state constitutions, statutes or court precedent in about half the states.

Lawyers for Detroit, however, are asserting that those guarantees do not apply because article 6 of the U.S. Constitution declares U.S. laws to be supreme. That would mean state guarantees go away in federal bankruptcy court, leaving retirees in the same pool as bondholders and other creditors who may get pennies for each dollar they are owed.

Kevyn D. Orr, the emergency manager appointed by Michigan’s Republican Gov. Rick Snyder to oversee the city’s finances, has called for “significant cuts” to the pensions of retirees but has not said how large these cuts would be.

He has also recommended that the city stop pension contributions for the 7,000 current workers and switch them to individual retirement savings plans.

To reduce the $5.7 billion in underfunded obligations for retirees’ health coverage, Orr plans to find a cheaper plan offered by the insurance exchange under the Affordable Care Act, which will take effect in 2014.

Orr, a Washington lawyer who represented Chrysler in its 2009 bankruptcy and restructuring, has proposed that Detroit‘s remaining finances be used to repay bondholders, who hold the lion’s share of the debt, so that they will continue to loan the city funds.

Orr wants to spend $1.25 billion over the next decade to modernize Detroit‘s infrastructure and overhaul its police, fire and emergency services. In July, Detroit had 78,000 abandoned and blighted buildings; police took about 58 minutes, on average, to answer 911 calls.

Retirees say it is wrong to reduce workers’ pensions so that bondholders who incurred losses because of mistakes in risk assessment can received a greater share. Over the years, municipal workers made many sacrifices to help the city. In 2011, Detroit police and firefighters agreed to a 15 percent cut in pension benefits.

Few Options

If approved, Orr’s plan would leave retirees with few options given the city’s high rate of joblessness, Roots said. “With 13.9 percent unemployment, even healthy, 65-year-old retirees will find it impossible to obtain a job that will replace their pensions, let alone an 85-year-old who hasn’t worked in 20 years and has multiple health problems.”

Access to transportation is a major obstacle to securing new employment. Public transit has been cut and Michigan’s gasoline prices are the highest in the nation.

Cindy Hounsell is president of the Washington-based Women’s Institute for a Secure Retirement, a nonprofit organization that conducts research and training workshops to help women cope with the financial challenges of retirement.

“Municipal employees are vulnerable,” Hounsell said in a phone interview. “Their jobs usually pay less than private employers do so they are unable to save for retirement.”

Detroit‘s city workers are covered by Social Security. Many workers in other cities, however, do not receive Social Security and could be out in the cold if their pensions were cut or eliminated.

Hounsell hopes that Detroit‘s bankruptcy will focus policymakers on the financial needs of vulnerable retired municipal workers. One solution might be to place public pensions under the protection of the Pension Benefit Guaranty Corporation.

Since 1974, under federal law, the Pension Benefit Guaranty Corporation has required private employers with defined benefit pensions to maintain certain funding levels for their pension funds and to pay for insurance premiums into a federally managed insurance fund.

In exchange, the Pension Benefit Guaranty Corporation insures up to $57,500 a year for a 65-year-old retiree.

“Expanding this coverage to cover public employees would not cost taxpayers a cent because the Pension Benefit Guaranty Corporation collects premiums and invests them just as mutual insurance companies do,” Hounsell said.

Municipal employees didn’t have to worry about losing their pensions in the past because pensions were considered sacrosanct by struggling municipalities. But cutting back on pension obligations as part of Chapter 9 bankruptcies became a new tool when Central Falls, R.I., a factory town, exited bankruptcy in 2012.

Bondholders received full payment while pensions were slashed by 55 percent. The 133 retirees sought relief from the state, which intervened and decreased the cuts to 25 percent.

Unlike Rhode Island, Michigan officials are unlikely to rescue Detroit‘s municipal workers.

Synder, Michigan’s governor, who led enactment of an anti-labor “right to work” law in 2012, told NBC‘s “Meet the Press” in July that he opposed a federal bailout for Detroit.

In 2008 and 2009, the state championed an $85 billion federal bailout of Chrysler and General Motors, which salvaged the U.S. auto industry.

“It is not about just putting more money into the situation,” said Snyder, the former CEO of Ardesta, a venture capital firm in Ann Arbor, Mich. “We’re being real now. The bankruptcy is about accountable government.”

The Obama Administration also ruled out a federal bailout in July when Treasury Secretary Jacob Lew told CNN: “Detroit has to work out its problems with its creditors on its own.”

President Barack Obama received 98 percent of the 300,000 votes cast in Detroit in November; Republican challenger Mitt Romney received 2 percent.