Workers and retirees approved pension cuts in Detroit’s bankruptcy by a landslide, the city reported Monday, a crucial step to emerging from the largest municipal insolvency in U.S. history.
The city disclosed 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 per cent pension cut and lose annual inflation adjustments. They accepted the changes with 73 per cent of ballots in favour. Retired police officers and firefighters would lose only a portion of their annual cost-of-living raise. Eighty-two per cent in that class voted “yes.”
The counting was done by a private company.
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 32,000 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 has said pension changes are unfortunate but necessary because two funds are underfunded by billions. If investment performance improves in the years ahead, he said, the cuts could be restored.
“I want to thank city retirees and active employees who voted for casting aside the rhetoric and making an informed positive decision about their future and the future of the city,” Orr said in a statement late Monday.
Many organizations, including the leaders of retiree groups, had urged a “yes” vote, insisting it was the best option under tough circumstances.
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.
Michigan Attorney General Bill Schuette believes Rhodes is wrong, but he said Monday he won’t appeal now that retirees have voted for the cuts.
“I will respect their decision,” he in a statement after the approval was announced.
Separately on Monday, a Boston-based restructuring expert hired to advise the judge said Detroit’s overall bankruptcy plan is “feasible,” a key standard at the upcoming trial. But Marti Kopacz warned that antiquated computer systems, a pledge to spend more than $1 billion to improve services after bankruptcy and a “cultural malady” among workers all will be challenges.
“There are ... employees who don’t grasp that their job is to provide a service to the taxpayers versus the taxpayers owing them a job,” Kopacz said in a report.