Detroit’s Bankruptcy Filing – Update as of 4/17/2014
DETROIT’S BANKRUPTCY FILING Update as of 4/17/2014
On Tuesday, April 15, 2014, an agreement was reached by the city of Detroit and negotiators for the Detroit General Retirement System and the Detroit Police & Fire Retirement System, and consists of: Cuts to pensions for general members of 4.5% with the elimination of an annual cost of living adjustment (COLA); No cuts to pensions for police and fire members, with a 1% annual COLA increase (down from 2.25%); and Creation of an independent investment advisory committee to vet all investments made by the boards of both pension systems.
The previous offer proposed monthly pension cuts of 26% for general members and 6% for police and fire members, with no COLA benefits for either side. The deal to preserve police and fire pension benefits is due in part to the stock market’s positive impact on the safety pension fund’s financial performance in the last 18 months and an increased investment rate of return.
The deal, like the original plan, is contingent upon an agreement between the state, foundations and the Detroit Institute of Arts Museum to raise $816 million over 20 years. To date, lawmakers have not approved the state’s share of $350 million. Kevyn Orr, Detroit’s emergency manager was expected to file the new plan with the U.S. Bankruptcy Court on Tuesday, April 15, 2014. The pension boards must still sign off on the deal and the police and fire retiree association agreed to support it as well. Both are expected to recommend a “yes” vote to the retirees and active vested members who will be receiving ballots on May 1. Judge Steven Rhodes must also review the plan to determine if it is fair and equitable. Re-cap of Events July 18, 2013 — Detroit filed for Chapter 9 bankruptcy.
December 3, 2013 — U.S. Bankruptcy Judge Steven Rhodes ruled that Detroit could formally enter Chapter 9 bankruptcy. Judge Rhodes made it clear that public employee pensions were not protected in a federal Chapter 9 bankruptcy stating that, “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy.” The judge emphasized that he would not accept “deep cuts” or necessarily agree to any pension cuts unless the City’s final reorganization plan is fair and equitable. Representatives from the American Federation of State, City and Municipal Employees (AFSCME), filed an immediate appeal asking the judge to send the case to the U.S. Court of Appeals.
December 4, 2013 — Detroit’s pension systems filed a request to appeal Judge Steven Rhodes’ decision, citing that the state constitution provides special protection for pensions, even under Chapter 9.
December 16, 2013 — Judge Rhodes allowed appeals of two of his critical rulings — finding Detroit eligible for bankruptcy and cuts to pension benefits for retirees — to proceed to the U.S. 6th Circuit Court of Appeals.
February 21, 2014 — Kevyn Orr, Detroit’s emergency manager, filed a plan of adjustment with the U.S. Bankruptcy Court to restructure the city’s $18 billion in debts and liabilities. It included pension cuts for general members of 26% and 4% for police and fire members. If rejected by the members, the cuts would increase to 34% and 10%, respectively. The plan is contingent upon an agreement between the state, foundations and the Detroit Institute of Arts Museum to raise over $800 million to fund the pensions and preserve the city-owned art collection. As a result, the city would not have to make contributions to either system until 2023. Also on this day, the U.S. 6th Circuit Court of Appeals agreed to hear the appeal to Detroit’s eligibility for bankruptcy.
March 31, 2014 — Kevyn Orr filed a revised bankruptcy plan which retained the cuts originally proposed for general members, but increased the cuts for police and fire members to 6% if they approved, or 14% if they rejected. The revised plan would also require the assets of both pension systems – the Detroit Police & Fire Retirement System and the Detroit General Retirement System – to be placed into irrevocable trusts so that the systems can receive funding from the state of Michigan.
Los Angeles, California has language in its constitution that makes it difficult for California cities to restructure their pension obligations through the bankruptcy process. The City and its employees have made progress in reducing the City’s future budget deficits through agreed changes in pension and healthcare costs, increasing operational efficiencies citywide, reducing the civilian workforce and increasing revenues.
The City’s general fund tax base is once again growing, posting year over year gains. Because of these budget reductions, reforms and increased revenues, the City’s financial position has improved over what it was only four years ago. And the City can now better manage its costs, including its pension and healthcare liabilities.
While the City’s contribution to LAFPP may continue to grow as the Plan continues to recognize the financial losses from the 2008-09 market crash, the City appears to be well able to continue funding the annual required contributions to the Plan.
In addition, unlike Detroit, the City is not losing residents, turning off streetlights, or struggling to send ambulances to medical emergencies. Our System remains well funded with a current combined funded ratio of 77.3% for both pension and retiree healthcare benefits. In fact, a study completed by the Pew Research Center in January 2013 indicated that LAFPP was one of the best funded pension systems in the country. Be assured that we at LAFPP are committed to protecting and providing your hard-earned retirement benefits. We will keep you updated through our website as more information becomes available.