Judge allows Detroit bankruptcy and possible pension cuts to proceed

A federal judge on December 3 ruled that Detroit’s bankruptcy could proceed and that the city could reduce pensions of retired employees in order to pay off its debts.

AFSCME, Detroit’s largest city employees unions, immediately appealed the judge’s ruling.

“It’s a sad day for the people of Detroit,” said Sharon Levine, an attorney for AFSCME, to CNBC. “We’ve already filed an appeal. We’re going to keep fighting for the pensions. We’re going to keep fighting for our members.”

Before Judge Steven Rhodes made his ruling, AFSCME members and community supporters rallied outside the courthouse, some holding signs that read, “Make the banks pay” and “Stop debt service to banks that destroyed Detroit.”

Some opponents of the city’s bankruptcy have argued that banks made predatory loans that contributed to the city’s financial difficulties. As an example, they cite a $1.5 billion pension certificate loan that UBS made to Detroit in 2005, a loan that eventually siphoned away millions of dollars in city revenue that could have been used for city services.

Inside the courthouse, AFSCME attorneys argued that the bankruptcy should not be allowed to proceed because the bankruptcy, which was filed in a federal court, interferes with the state’s sovereignty, and more specifically, that it puts pensions that are protected by the state’s constitution at risk.

The US Justice Department testified in court and submitted briefs arguing that the bankruptcy should be allowed to proceed even if it meant that retirees’ pensions would be reduced.

In his ruling, the judge agreed with the Justice Department, but cautioned the city that the pension cuts that the city proposes in its bankruptcy exit plan should not be too severe.

However, that admonition was not comforting to many Detroit retirees.

“It’s mind-boggling. It’s disgusting. It’s horrible,” said Mashuk Meah of Detroit, who worked for 34 years for the Detroit Water and Sewerage Department, to the Detroit Free Press. “There will be many people hurt by this. All I can do is pray that Kevyn Orr (the emergency manager overseeing the bankruptcy) is fair.”

Meah told the Free Press that the judge’s ruling could mean that he and his wife may lose their home.

The mainstream press has partially blamed Detroit’s overly generous pensions for the city’s financial difficulties, but the truth is that the average pension for Detroit’s non-emergency workers are only a modest $19,000 a year. Many if not most of these workers don’t receive Social Security payments.

The judge’s ruling could have a broad impact well beyond Detroit.

Detroit’s pensions were supposedly protected by the state’s constitution, which on the surface made them appear to be inviolable, but if Judge Rhodes’ decision is allowed to stand other protections meant to secure pension obligations could be rendered meaningless.

“This is one of the strongest protected pension obligations in the country here in Michigan,” said Bruce Babiarz of the Detroit Police and Fire Retirement System to the New York Times. “If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone.”

The judge’s ruling allows Orr to proceed with formulating a plan for paying off the city’s creditors and exiting bankruptcy.

In addition to cutting pensions to pay off creditors, Orr’s plan will likely include a proposal to sell city assets to private investors.

Orr last summer said that he was considering a plan that would allow the city to sell its Water and Sewage Department.

The Detroit News reports that several private equity firms have expressed interest in buying the publicly owned water works, but only if they are allowed to increase rates that are currently protected by state law.

Whatever happens as a result of the Judge Rhodes’ bankruptcy ruling, AFSCME and community members opposed to the bankruptcy will continue the fight to protect the public’s interest.

“We are. . .  going to continue the struggle against the Detroit bankruptcy,” said Rev. Charles Williams II, president of the Michigan chapter of the National Action Network to the Free Press. “The citizens are very concerned about the fact that our mayor didn’t lead us into bankruptcy, our city council never voted for bankruptcy, but the emergency manager and (Michigan) Gov. (Rick) Snyder brought us to this place.”


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