Losing Ground

photo taken by Mandi Wright, Detroit Free Press

Losing Ground

A recent Detroit Free Press article, quoting figures from the U.S. Census bureau, tells us that 23% of all Michigan households live on retirement income.  As the U. S. economy limps along with it's "jobless recovery," Michigan still remains among the hardest hit of all states. On July 18, 2013, Detroit, Michigan's largest city, became the largest U.S. city to ever file for Chapter 9 bankruptcy. As the bankruptcy proceedings make their way through Federal court in downtown Detroit, at the top of the list of issues they are grappling with is proposed cuts to public employee pensions. 

The Emergency Manager in Detroit draws the distinction that he is "only" proposing to cut the amount of money the City owes the two retiree pension funds by offering them .10 cents on the dollar. (Which will result in cutting pensions.) This is the same amount he proposes to give "other creditors" like the banks, who are insured, and the bond holders, who are also insured. ERISA, which offers some protection for private pensions, does not cover public employees. Unfortunately, the only protection public employees in Michigan have, is language in the state constitution which the Emergency Manager claims is voided by a federal bankruptcy filing.

(The Republican governor of Michigan targeted public employee pensions for an income tax increase, shortly after taking office in 2010, and his Republican controlled legislature approved this very specific tax increase on public employee pensions.) 

There's a legitimate question whether the state had the legal authority to appoint an Emergency Manager, and whether the EM took legally appropriate action in filing for bankruptcy. For instance, has the EM sufficiently proved, as the law requires, that the solvency of the city is at immediate risk and bankruptcy is the only remedy? Legal questions also remain as to whether the Emergency Manager bargained with creditors in good faith, another requirement prior to a Chapter 9 filing. These issues and others have yet to be determined.

Meanwhile, according the procedures set forth in Chapter 9 municipal filings, committees of various creditor groups have been established, mediators have been appointed, and negotiations have begun. A Chapter 9 filing acts as injunctive relief from individual lawsuits by creditors, but unlike Chapter 7 & 11, a judge cannot force a settlement. He can facilitate one, he can mediate, and he has final approval on a plan of adjustment agreed to by the various parties and submitted by the Emergency Manager. 

We will be monitoring these proceedings very closely and will keep readers informed. Why? because pensions are at risk, and because there are nearly 600,000 public employees in Michigan, nearly 800,000 in Illinois, and close to 2.3 million in California. These states are also grappling with underfunded public pension issues. Stay tuned.