Detroit retirees cheer, creditors rip deal for less severe pension cuts
A day after Detroit scaled back from the large pension-benefit cuts it had once been proposing, the bankrupt city fended off charges from some that it had simply caved in to retirees in ways that could come back to haunt it. But it also felt the elation of many who had feared a more dire outcome.
The New York Times
DETROIT — The relief was palpable.
“My pension is my life,” Thomas Berry, a retired police detective, said Wednesday, reacting to tentative deals struck between Detroit, the city’s pension funds and a retirees’ group that would mean no cuts to his current pension checks, though smaller cost-of-living increases.
“I’m OK with that,” Berry said, “because a month ago, we were going to lose everything.”
A day after Detroit scaled back from the large pension cuts it had once been proposing, the bankrupt city fended off charges from some that it had simply caved in to retirees in ways that could come back to haunt it. But it also felt the elation of many of its current and former employees who for months had feared a more dire outcome.
“It’s a quantum leap forward from what the pensioners were being offered, that’s for sure,” said Douglas Bernstein, a bankruptcy lawyer who is not involved in the pension negotiations. “I’m pretty sure that the judge will require them to show that this deal is in fact affordable.”
The deal was eased by a decision to project better pension-fund returns because of the stock market’s performance last year, and fears by the workers’ negotiators that if they did not accept the agreement the terms would get worse.
“This is not so much a settlement as a reinstatement; it’s a complete and total capitulation to retired pensioners to secure their plan support,” said Stephen Spencer, an adviser to the Financial Guaranty Insurance, one of Detroit’s more than 100,000 creditors.
The deal seemed sudden and puzzling to some who wondered how a city could suddenly afford so much more than before.
As recently as two weeks ago, Detroit officials, who say the city’s unfunded pension liabilities amount to $3.5 billion of the city’s $18 billion in debts, had revised estimates of how pensions might be cut, and at that point the cuts threatened to go even deeper.
Because of differences in funding levels in the city’s two pension funds, retired firefighters and police officers had been expected to see cuts between 6 and 14 percent, while other retirees were told to prepare for cuts between 26 and 34 percent.
The city gained flexibility, in part, by agreeing to assume a higher rate of investment return by the funds themselves. Projecting a rate of return is an essential part of fiscal policy, but experts often debate what is both realistic and sustainable for public pensions, and the federal bankruptcy judge in the case will be the ultimate arbiter.
In addition, the city has factored into the new agreement a separate, unusual deal that would save the collection of the Detroit Institute of Arts and would add more than $800 million to the pensions with money from charitable foundations and the state, which has yet to approve the funds.
“This is a dynamic process that changes day by day,” said Bill Nowling, a spokesman for Kevyn Orr, the emergency manager leading Detroit through bankruptcy and who filed a revised plan with the court Wednesday for an exit from bankruptcy.
For the retirees, there was pressure to accept a deal for fear a better one might not come along.
Steven Rhodes, the federal bankruptcy judge, has urged all parties to negotiate in recent days.
Rhodes ruled last December against the pension funds, which had argued that the state’s constitution protected them from cuts. But he was also solicitous in allowing groups of ordinary retirees and workers to come before the court to argue that their benefits should be retained.
Some of the financial creditors have been asked to accept 15 cents on the dollar for debts owed them, and the arrangement with retirees was seen by some as yet another sign that Detroit leaders were leaning in favor of Main Street over Wall Street as they searched for a way to resolve their debt and remake the city.
Uncertain, so far, is what a court-appointed committee of retirees and city union leaders think of the deal. But many seemed mainly surprised — and relieved.
“It’s a big burden lifted off your shoulders that now, after working all these years, you don’t have to fight for your pension, that you already worked for, that was promised to you,” said Roslyn Banks, a retired Detroit police sergeant.