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.”

Detroit workers: “Jobs, Pensions, City Services–The Banks Owe Us!”

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.

Miners march for fairness at Patriot Coal

More than 7,000 people marched through the streets of Charlestown, West Virginia to protest Patriot Coal’s attempt to eliminate health care benefits for retirees and to reduce wages, benefits, and working conditions for Patriot’s union miners. Sixteen people including seven rank and file United Mine Workers of America members and UMWA President Cecil Roberts were arrested after staging a sit-in on the steps of Patriot’s headquarters.

“This is a crime,” said Roberts referring to Patriot’s actions. “We’ve been robbed, tricked and lied to. This cannot stand – and with thousands of us from all over the country marching today and keeping up this fight tomorrow, it will not stand.”

Patriot in July 2012 filed for Chapter 11 bankruptcy and is seeking permission from the court to modify its collective bargaining agreement with UMWA. The modification would allow it to eliminate health benefits for 10,700 retirees, survivors, and family members and to reduce benefits, wages, and working conditions of its union miners to levels that are closer to those of non-union miners.

Patriot in 2007 was spun off from Peabody Energy, the world’s largest private sector coal company.

UMWA has filed suit charging that the spin-off was fraudulent. According to UMWA, the spin-off was designed to set Patriot up for failure in order to shed Peabody of retiree pension and health care costs. The spin-off resulted in Patriot assuming 43 percent of Peabody’s pension and health care liabilities but only 11 percent of its productive assets.

Many of the retirees affected by Patriot’s proposal never worked for the company.

“I never worked a day for Patriot Coal,” said Shirley Inman, a retired miner. “I don’t care what the corporate name is, those executives made us a promise: We’d mine their coal, and in exchange we’d have good health care while we worked and after we retired. I kept my promise; they should keep theirs.”

On April 2, the day after the mass march in Charlestown, Patriot creditors and Patriot itself sought permission from the bankruptcy court to further investigate the spin-off to determine whether it was fraudulent.

“Patriot is a Peabody creation,” said the creditors’ lawyers in a court filing. “Peabody selected which of its mines would become Patriot’s. Peabody determined what projections would underlie Patriot’s business plan. Peabody decided which liabilities it would retain and which it would unload onto Patriot.”

UMWA has also been holding demonstrations at Peabody’s world headquarters in St. Louis, Missouri and has launched a Fairness at Patriot campaign.

Patriot’s proposed modifications would allow it to reduce labor costs, including its obligation to retirees, significantly.

Patriot is proposing that health care coverage through the National Bituminous Coal Wage Agreement be eliminated. Union miners still working for Patriot would receive health care through a less generous plan that Patriot’s non-union workers have.

For retirees, Patriot proposes setting up a Voluntary Employee Beneficiary Association, or VEBA. The company would initially fund the VEBA with a $15 million lump sum payment, well below the $71 million that the company spent on retiree health care benefits in 2012. Patriot says that the VEBA could receive as much as $300 million in future profit-sharing to sustain it.

These profits, if they do materialize, will come from cuts to wages and benefits that Patriot hopes to gain through its bankruptcy filing. According to Patriot’s proposed modification, wages for its union miners would be reduced to “the compensation level of Patriot’s more than 1,200 non-union employees who perform exactly the same jobs as the UMWA-represented miners.”

Patriot acknowledges in its court filings that its proposal if accepted “will impose a very real hardship on unionized employees and retirees.”

The problem faced by UMWA members at Patriot is a problem that has become all to common. As union membership declines, workers have less power to negotiate and maintain fair collective bargaining agreements.

A decade ago union miners were about 30 percent of the coal mining workforce. Today, union miners are about 20 percent of the workforce. When the UMWA was at the height of its power, it represented even a larger percent of miners. At that time, UMWA was able to win trend setting health care benefits for members and families.

Despite the challenges facing union members, UMWA’s march for justice at Patriot has had an impact. Nearly all of West Virginia’s political leaders have lined up in support of the miners. The West Virginia House passed a resolution urging Patriot to maintain its retiree health care benefit.

“Patriot doesn’t have to go down this road,” Roberts said. “We can help Patriot solve its problems, with a solution that keeps the promises made to retired miners, and provides decent pay, benefits and working conditions to active miners.  Patriot’s problems are not rooted in competition with other coal companies, they’re rooted in not having the assets to pay Peabody’s and Arch’s (another company that spun off its retiree liabilities to Patriot) bills.”

As Hostess prepares to sell brands, workers set the record straight on company’s demise

Hostess, which filed for bankruptcy last year and began liquidating its assets in November, announced that it has accepted the latest stalking-horse bid worth $410 million for the purchase of its snack cake brands, bringing the total amount of stalking-horse bids for its bakery brands up to $858 million. The bids establish a floor where bidding will begin at a February 28 auction when the bankrupt company’s brands and assets will be put up for sale.

C. Dean Metropoulos & Co. and Apollo Global Management joined together to submit the snack cake bid. The bid is a proposed price for brands such as Twinkies and Dolly Madison and five bakeries where the products were made.

C. Dean Metropoulos & Co. has bought other famous but troubled brands including Pabst Brewing Co. and successfully turned them around.

“We share these bidders’ goal of quickly restoring Twinkies®, CupCakes®, Ding Dongs® and Ho Hos®, among others, to shelves across America, and view new, serious ownership as a necessity for building a sustainable model for these brands moving forward,” said David Durkee, president of BCTGM, a union representing 5,000 Hostess bakery workers. “The BCTGM looks forward to the opportunity to work together productively and is now engaging with bidders who recognize the value that we can bring to an ongoing business.”

Previously, Hostess had accepted a $360 million bid from Flowers Food, Inc. for Wonder Bread, Butternut, and other bread brands and 20 bakeries where they were made. Two other companies made successful stalking-horse bids on other lesser known Hostess brands.

The $858 million stalking-horse bids are almost twice as high as a 2011 estimate of the company’s worth.

Hostess went out of business in November after BCTGM members went on strike.

Before the strike, members overwhelmingly rejected the company’s take-or-leave-it final contract offer that cut wages by 27 percent over five years, increased worker health care expenses, reduced health care benefits, and did not restore pension contributions.

The media has dutifully reported that the strike caused Hostess to go out of business and lay off 18,000 workers, but Mike Hummel, a member of BCTGM Local 218 and a 14-year Hostess employee, tells a different story in a video entitled, “Inside the Hostess Bankery: Who Keeps the Dough.”

According to Hummel, the three private equity firms that own Hostess purposely provoked the strike by making a lowball final last best offer, which they knew BCTGM members could not accept. They then used the strike as an excuse to liquidate the company and sell off its assets.

The sale, says Hummel, will turn a nice profit for the private equity firms.

Ripplewood Holdings, Silver Point Capital, and Monarch Alternative Capital bought Hostess in 2009 after the company filed for bankruptcy for the first time. As part of the deal, the new owners asked Hostess union workers to make contract concessions estimated to be worth $110 million.

The new owners said that they would use money saved by the concessions to modernize the bakeries and make Hostess products competitive.

Among other concessions, workers agreed to allow the owners to deduct $10 a week per worker from worker paychecks. The deductions would be used to fund infrastructure improvements at the bakeries.

But according to the workers interviewed by Hummel, those investments never took place.

The CEO gave himself and other executive raises and bonuses, then blamed the workers for the bankruptcy, said Kenneth, a Local 218 member. “I feel if they were going to do something like that, they should put it on the fact that they didn’t spend money on equipment that we were working with because a lot of equipment was breaking down and needing repairs,” he said. “The money they stuck in their pockets should have been money that they should have invested in the company.”

Other workers interviewed by Hummel tell a similar story. Workers constantly had to make do with broken and antiquated equipment and few if any of the promised modernizations ever got off the ground.

In addition to not keeping their promise to invest in the company, the new owners decided to keep workers’ money that was supposed to be used to fund pensions.

Under terms of the old contract, BCTGM members’ compensation package includes $4.25 per hour per worker that went to the workers’ pension fund, which pays for a pension, retiree insurance, and a death benefit. But in August 2011, Hostess stopped sending that $4.25 an hour to the pension plan and instead kept it. Some of that money was used to pay executive bonuses and raises.

“They stole $50 million from our pension,” Hummel said.

The company owners have never returned this money, and the bankruptcy court has ruled that they don’t have to.

According to Hummel, the theft of their pension and the new owners’ broken promise to invest in the company made BCTGM members wary of making more sacrifices, and that’s what led to the company’s demise.

Hostess prepares to implement final offer, BCTGM prepares to strike

Hostess Brands workers are waiting for the company to make its next move as Hostess tries to impose a new labor contract that has been approved by a bankruptcy court. One of the unions that represents workers at the company’s bakeries, the Bakery, Confectionary, Tobacco Workers, and Grain Millers Union (BCTGM), has said that imposing the terms of the new contract will result in a strike by its members.

In September, 92 percent of BCTGM members rejected a final offer by Hostess, which in January filed for Chapter 11 bankruptcy. Hostess’ final offer, which cuts pay by 8 percent, freezes pensions, increases worker health care costs, and changes work rules, was a key piece of the company’s plan to exit bankruptcy.

Before BCTGM rejected Hostess’ final offer, 54 percent of Teamster members who work for Hostess and voted on the offer chose to accept it. Teamster leaders did not endorse the final offer, but told members that rejecting it could result in job losses.

Prior the voting, Hostess CEO Gregory Rayburn’s said that if either of the two unions or the 10 other unions that have smaller numbers of members working for Hostess rejected the final offer, the company would shut down and liquidate its assets.

After BCTGM members rejected the offer, Hostess changed its mind about going out of business and instead returned to court to ask the bankruptcy judge to allow the company to impose the terms of its final offer. It argued that imposing the offer was essential if the company wanted to exit bankruptcy because high labor costs had caused the bankruptcy.

Throughout the bankruptcy proceeding, both the Teamsters and BCTGM have maintained that poor management rather than high labor costs caused the business failure that resulted in Hostess’ second bankruptcy in less than ten years.

“Our members have seen this company squander more than $50 million that it was contractually obligated to put towards our members’ pension,” said BCTGM President Frank Hurt after members rejected the final offer.  “They have seen the company fail to invest in product development and new plant and equipment as was promised when the company emerged from its previous bankruptcy (in 2009) and for which our members made significant concessions.”

Last spring a business restructuring expert hired by the Teamsters testified at a bankruptcy hearing that Hostess management failed to invest sufficiently in modernizing production, hollowed out Hostess’ once dominant distribution system, and did a poor job of marketing its products.

Another expert hired by the Teamsters testified at the same hearing that Hostess’ labor costs were comparable to regional competitors.

Nevertheless, during the October hearing on Hostess’ request to be allowed to impose its final offer, the judge sided with the company and on October 4 ruled that the company could proceed with imposing its final offer on BCTGM and five other unions that either rejected the offer or are still considering it.

After winning the judges approval, Hostess said that it will impose the final offer within the next 45 days. BCTGM has said that doing so will result in a strike.

BCTGM locals have been meeting to plan for a strike if the company imposes the new terms.

After BCTGM members rejected the company’s final offer in September, Hurt explained why.

“(Members) rejected (the offer) because it was an outrageously unfair proposal from a company that has destroyed the trust of its workers through years of mismanagement, greed and unfulfilled promises,” Hurt said.

The company exited from its first bankruptcy in 2009 after both the BCTGM, the Teamsters, and other unions agreed to concessions. Teamsters estimated the cost of their concessions to be $60 million.

After the unions agreed to concessions, Hostess’ former owner Interstate Bakeries Corporation reached a deal with Ripplewood Holdings, a private equity company, for Ripplewood to purchase the company.

Ripplewood committed $130 million of its own money to the deal and borrowed hundreds of millions of dollars from General Electric Capital, GE Capital Markets, Monarch Master Funding, and Silver Point Finance.

As part of the deal, Ripplewood paid itself $3 million in management fees to oversee the restructuring of Hostess.

Hurt is wary that Hostess’ final offer to its union employees is just another way to force another round of concessions that will make Hostess more attractive to another private equity buyout.

“Our members know that this is a company that is controlled by Wall Street private equity and hedge fund firms, whose sole objective is to maximize their own returns, not rebuild a company for the long haul,” Hurt said.

Hurt said that a deal with Hostess is still possible if Hostess pays the $50 million in pension contributions that it has withheld from BCTGM members and returns to the bargaining table with a fair offer that includes a plan for long-term growth at the company.