Retiree benefits are hanging in the balance for municipal workers in Detroit.
The Motor City filed for Chapter 9 bankruptcy protection Thursday, with the support of its emergency manager, Kevyn D. Orr. The hundreds of pages of legal documents filed in bankruptcy court cite “decades of fiscal mismanagement, plummeting population, employment and revenues, decaying city infrastructure, deteriorating city services and excessive borrowing.”
Detroit and retirees in the city’s two largest pension systems — The General Retirement System and the Police and Fire Retirement System — are at a crossroads that’s likely to end in court.
Retirees in the two pension plans are concerned that the city could use the bankruptcy filing as a way to change the retirement benefits.
But the state constitution bars such changes and the two retirement systems filed suit Wednesday against Mr. Orr and Gov. Rick Snyder in the Ingham County Circuit Court in Lansing, challenging them to authorize bankruptcy proceedings that would affect the benefits paid to workers.
The fact that a state statute protects the municipal retirement benefits makes this a unique case, even in comparison with other municipalities that have filed for Chapter 9, such as Jefferson County, Ala. Filing bankruptcy can permit municipalities to revisit their employment contracts and agreements with unions, as was the case when Vallejo, Calif., filed for bankruptcy protection in 2008 and then cut retiree health benefits.
“We have a Michigan statute that hasn’t been tested in a bankruptcy situation, and using Chapter 9 to modify vested benefits is going to require an interpretation of that state statute,” said Jay L. Welford, an attorney with Jaffe Ritt Heuer & Weiss. “These are uncharted waters.”
Advisers in the area have been bracing clients for Detroit’s bankruptcy filing. “We’ve seen this coming, so I’ve been preparing them to save money and shore up for health care expenses,” said Leon LaBrecque, managing partner at LJPR LLC in Troy, Mich.
The biggest fear is that retiree health care arrangements are up for grabs and can be negotiated away, requiring retirees to pay more out of pocket for their care. Many municipal workers in Detroit didn’t pay into Social Security and aren’t covered by Medicare, according to Mr. LaBrecque. “Those poor people could end up with dramatic increases in health care expenses.”
He added that it could be difficult to cut income for individuals who are already receiving a pension, but eliminating cost of living adjustments could also be a way to give those retirees “the lightest of haircuts.” “If that’s the worst thing to happen, you can live with it,” said Mr. LaBrecque
Detroit has more than $18 billion in accrued obligations, according to Mr. Orr’s filing. Of that, $5.7 billion comes from so-called “other post employment benefit” accounting liabilities ($6.4 billion if the present value of future expected benefits is used) and $3.5 billion in underfunded pension liabilities.
Retiree health care benefits account for millions of dollars in expenses. Last year, the total cost of health care benefits citywide was $275 million, with $177 million related to retirees, according to Mr. Orr’s filings.