AFSCME District Council 25 in Michigan on August 19 filed pleadings in US Bankruptcy Court challenging the City of Detroit’s July bankruptcy filing.
If Detroit’s bankruptcy is allowed to proceed, it is possible that the city will be able to terminate its collective bargaining agreements with workers and impose new terms of employment on them. Bankruptcy will also mean that retired frontline city workers whose pension’s average between $17,000 and $19,000 a year may have their pensions reduced.
Meanwhile, Diane Bukowski, writing for the Voice of Detroit, reports that city officials have taken special steps to protect the interests of UBS, SBS Financial Services, and Bank of America, creditors who in 2005 and 2006 sold credit default swaps to the city.
Detroit Emergency Manager Kevyn Orr has said that these credit default swaps are partially responsible for the city’s financial woes that led to the bankruptcy filing.
On the day that AFSCME filed its objections, members of the union, including retired city workers picketed in front of the courthouse where the objection was filed.
Union members carried signs reading, “Jobs, Pensions, City Services: The Banks Owe Us!”
The union in its objections argues that Michigan’s emergency manager law is unconstitutional. The law gives the governor the right to appoint an emergency manager when a municipality faces financial difficulties. The powers of the emergency manager exceed those of all elected officials.
After his appointment by Gov. Rick Snyder, Orr took control of Detroit in March and on July 18, filed for bankruptcy on behalf of the city.
The union also contends that the bankruptcy should not be allowed to proceed because the emergency manager law also does not protect retirement benefits earned by workers during their years of employment with the city.
In addition to AFSCME, about 50 residents of Detroit also filed objections to the bankruptcy proceedings.
“The City of Detroit has too many assets to be bankrupt,” wrote Detroit retiree Olivia Gillon in her objection. “Detroit is no different than hundreds of other American cities that are cash-strapped and want to get their hands on retiree pension funds. If the federal court allows our pension fund to be raided, it will open a flood gate for hundreds of other cities.”
Other creditors including Detroit worker pension funds also have filed objections.
Judge Steven Rhodes will hold hearings on the objections in October.
In September, Rhodes will hold hearings on objections to a deal between the city and UBS, Bank of America, and SBS Financial Services struck three days before Detroit’s July 18 bankruptcy filing.
The city and these three banks on July 15 signed off on a forbearance agreement, which guarantees that the banks will be paid $0.75 on the dollar for credit default swaps that they sold the city as a hedge against pension obligation certificates, bought in 2005 and 2006 to pay for its pension contributions.
The agreement between the city and the banks releases $11 million in casino tax revenue that the banks contend is collateral for the swaps.
The swaps were supposed to protect the city in case it was unable to repay the pension obligations certificates, whose interest rate was 0.6056 percent.
When the economy crashed in 2008, Detroit was hit hard and was unable to make payments on the pension obligation certificates, which caused it to buy more swaps.
Since then, Detroit has been making payments on the swaps, whose interest rate is 6.323 percent.
The union in its objections estimates that the city has already paid $800 million as a result of the swaps.
The union’s objections also point out that UBS and Bank of America have been charged and reached settlements in a number of cases involving municipal bond fraud.
Furthermore, while other creditors’ claims have been put on hold as a result of the bankruptcy filing, the city has continued to make payments to the three banks. The union estimates that if the forbearance agreement is allowed to stand, it will cost the city $200 million over the next six months.
David Sole, a retiree who also filed an objection to the bankruptcy, contends that the economic crash that hit Detroit so hard and ultimately resulted in the bankruptcy filing was caused by predatory lending practices of banks like Bank of America and UBS.
“The financial crisis that precipitated this Chapter 9 bankruptcy filing was in large part a result of the effects of predatory lending by the banks against the residents of Detroit, which resulted in tens of thousands of foreclosures in the city, a massive population decline and a precipitous decline in property values.” said the objection filed by Sole.