Detroit retirees vote in favor of pension cuts

7/22/2014

DETROIT  — Workers and retirees approved pension cuts in Detroit’s bankruptcy, the city announced Monday, a crucial step to emerging from the largest municipal insolvency in U.S. history.

The city reported results from two months of balloting, which ended July 11. Judge Steven Rhodes still must hold a trial in August to determine if Detroit’s overall bankruptcy plan is fair and feasible to all creditors, from Wall Street to Main Street, but support from retirees is vital.

“It’s clearly a victory for the city,” said Anthony Sabino, a bankruptcy expert who teaches business law at St. John’s University in New York. “It will pave the way for a confirmation hearing. Detroit will be able to move forward, not with absolute financial certainty but far more than Detroit has enjoyed in decades.”

General retirees would get a 4.5 percent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose a portion of their annual cost-of-living raise.

Ballot approval of the pension changes triggers an extraordinary $816 million bailout from the state of Michigan, foundations and the Detroit Institute of Arts. The money would prevent the sale of city-owned art and avoid deeper pension cuts. The judge, however, still must agree.

“It’s absolutely unprecedented in a bankruptcy,” Sabino said.

There are tens of thousands of creditors in Detroit’s $18 billion bankruptcy, from bond holders to businesses that provide soap, but much of the focus of the last year has been on the roughly 30,000 retirees and current and former workers banking on a pension. They have put a real and often anguished face on the process.

The average annual pension for police and fire retirees is $32,000, while most other retired city workers get $19,000 to $20,000. Detroit emergency manager Kevyn Orr said pension changes are unfortunate but necessary because two pension funds are underfunded by billions. If investment performance improves in the years ahead, he said, the cuts could be restored.

The Michigan Constitution says public pensions can’t be cut, but Rhodes, in his most significant decision in the case, said in December that federal bankruptcy law trumps that shield. It was a groundbreaking opinion that could influence local governments across the country that go broke