Even before one of their
own was appointed emergency manager of the city, lawyers who were consulting
with Michigan officials over the winter believed Detroit should move
into bankruptcy proceedings that would free the city to
walk away from its commitments to retirees. Emails between Kevyn Orr — now
Detroit’s emergency manager but at the time an attorney for the law firm Jones
Day — and his colleagues show the lawyers believed moving directly to bankruptcy
would be better for the city than going through a serious negotiating process.
In one email, an assistant
to Gov. Rick Snyder (R) promises to set a meeting between Orr and someone “who is not FOIAble,”
suggesting an intent to evade transparency laws. In another, Jones Day lawyers
suggest to Orr that elevating Detroit’s bankruptcy in national media coverage
would “give you cover and options on the back end to make up for lost time
there.” Orr rejected that suggestion as unhelpful. Jones Day continues to
represent Detroit in the proceedings, which
could take a year or longer.
The messages made public
thusfar show Jones Day attorneys defining bankruptcy as inevitable in their own
words.
“It seems that the ideal
scenario would be that Snyder and Bing both agree that the best option is
simply to go through an orderly Chapter 9 [bankruptcy],” one Jones Day attorney
writes to Orr in the emails. “Appointing an Emergency Manager, whose ability to
actually do anything is questionable given the looming political and legal
fights, would only serve to kick the can down the wrong path and unreasonably delay
any meaningful resolution of Detroit’s problems.” Defining bankruptcy as the
only route to a “meaningful resolution of Detroit’s problems” casts further
doubt on the intent of the negotiations that followed Orr’s appointment in
March, but a spokesman for Orr called those doubts “absurd.”
The emails were released in
response to a Freedom of Information Act request by Robert Davis, a local labor
activist with a troubled history. Davis faces federal corruption charges over
school board funds that were spent on an advertising campaign. When the charges
were filed in 2012, Davis called them politically
motivated and said he is innocent.
One January exchange shows
Orr reluctant to take on the emergency manager job, and concerned that the law
empowering Gov. Rick Snyder (R) to appoint such officials “is a clear
end-around the prior initiative that was rejected by the voters in November.”
One January 31, Orr wrote that the entire emergency manager system “appears to
merely adopts [sic] the conditions necessary for a chapter 9 filing.”
Orr’s assessment of the
emergency manager process reinforces retiree advocates’ arguments that Orr’s
actions once appointed were not good-faith negotiations with city employees,
but an effort to check necessary boxes prior to filing for bankruptcy. In June,
when Orr issued a proposal to retirees and bondholders in lieu of declaring
bankruptcy, analysts wrote that the
proposal appeared designed to be unpalatable, paving the way for the bankruptcy
filing. Orr and Snyder have made clear that the bankruptcy
resolution will include some cuts to retiree benefits, which are about $1,600 per month for most of the city’s 21,000 pensioners. “They made me some
promises, and I made them some promises,” 76-year-old retired police sergeant
William Shine told the New York Times. “I kept my promises. They’re not
going to keep theirs.”
Some legal hurdles may prevent the
city from reneging on pension promises in bankruptcy, but the
outlook is uncertain.
Three Potential Legal Obstacles To Using Detroit’s Bankruptcy To
Slash Pensions
The legal issues surrounding Detroit’s bankruptcy filing are a mess.
And, depending on how these thorny and uncertain issues are resolved, this
bankruptcy could potentially force thousands of retirees into abject poverty.
Detroit city manager Kevyn Orr, an appointee of Gov. Rick Snyder (R-MI), hopes
to use bankruptcy to cut Detroit’s $11.5 billion debt down to just $2 billion —
potentially cutting an average retiree’s pension benefits by 83 percent in
the process.
Pensioners are at risk because of a hole in federal law — the
federal Pension Benefit Guaranty Corporation provides a minimal level of
benefits to retirees when a private business goes bankrupt, but it provides no
such security to pensioners in the public sector. As a result, retired Detroit
police officers, firefighters and other former city employees could lose the
lion’s share of benefits that are not particularly generous to begin with. The average
retired Detroit police officer or firefighter receives just $30,000 a year in
pension benefits — as compared to $42,000 in Kansas City, $47,000 in Dallas, or
$58,000 in Los Angeles.
Several potential legal roadblocks stand between Detroit and
bankruptcy, however — or at least between Kevyn Orr and his plan for sweeping
pension cuts. Here are a few:
1.
The Michigan Constitution
The most obvious obstacle to this bankruptcy is a state judge’s
decision last Friday declaring it unconstitutional under the Michigan state
constitution. That constitution provides that “[t]he accrued
financial benefits of each pension plan and retirement system of the state and
its political subdivisions shall be a contractual obligation thereof which shall not be
diminished or impaired thereby.” Thus, to the extent that Detroit’s
bankruptcy filing seeks to diminish already-accrued pension benefits, the
filing itself may be unlawful.
The state judge’s ruling ordering the bankruptcy filing withdrawn
is already on appeal, and it’s likely that this issue
will ultimately be resolved by the state supreme court — which has a 5-2 Republican majority. So there is no guarantee
that the trial judge’s order will ultimately be upheld on appeal.
2.
Federal Bankruptcy Law
Even if federal bankruptcy courts proceed with resolving Detroit’s
bankruptcy, federal bankruptcy law itself may prevent incursions into retirees’
pensions. Under federal law, Detroit may only file for bankruptcy if it “is
specifically authorized” to
do so under state law. On its face, this provision appears to preclude Detroit
from filing bankruptcy, since the Michigan constitution also appears to
prohibit Detroit from taking any action that would reduce its pension
obligations.
Georgetown Law Professor Adam Levitin suggests that another provision of law may apply, however — a
provision that would allow Detroit’s bankruptcy to move forward while also
protecting pensioners. That provision provides that a court must confirm that
Detroit “is not prohibited by law from taking any action necessary to
carry out” a plan to discharge the city’s debts. Thus, because the
Michigan constitution prohibits Detroit from reducing accrued pension
obligations, the combination of this constitution and federal law “should
protect unionized and non-unionized employees’ accured pension benefits.”
Nevertheless, Levitin also warns of a potential bait-and-switch.
It’s possible that the Michigan courts could permit Detroit to file bankruptcy
— perhaps on the assumption that federal law protects the pensioners and thus
the state constitution would not be violated by such a filing — only to have a
federal bankruptcy judge decide to slash those pensions anyway. Moreover, as
Levitin also notes, the Michigan constitution may not provide complete
protection to retirees and current workers — “it’s worth noting what the
Michigan constitution does not do: it provides no protection for non-accured
pension benefits. Current employees might find the terms of their pension plans
changed going forward. It’s also not clear to me whether this provision extends
to protect accrued retiree health benefits.”
3.
Premature Filing
Finally, federal bankruptcy law requires Detroit to show that it
“has negotiated
in good faith with creditors and
has failed to obtain the agreement of creditors holding at least a majority in
amount of” the debts it seeks to discharge in bankruptcy. Orr himself predicts
a legal fight over “whether or not the city made a good faith effort to negotiate
with creditors over
its more than $18 billion of debt.”
Detroit: judge to decide if bankruptcy can proceed despite pension funds' opposition
City's funds have gone to court to try and derail the bankruptcy amid concerns benefits will be slashed for 20,000 retirees
Orr made the decision to file for chapter 9 bankruptcy protection after failing to reach an agreement with city's creditors and pension funds. Photograph: Paul Sancya/AP
A federal judge will decide on Wednesday whether to allow Detroit's historic bankruptcy case to proceed as opponents lobby for the filing to be blocked amid concerns about its impact on pensioners.
US bankruptcy court judge Steven Rhodes will hear an appeal brought by Kevyn Orr, the city's emergency overseer, to put a hold on lawsuits aimed at stopping the so-called chapter 9 filing.
Detroit's pension funds have gone to court in an effort to derail the biggest municipal bankruptcy in US history amid concerns that benefits will be slashed for the city's 20,000 retirees.
Orr's opponents won the backing of Ingham County judge Rosemarie Aquilina on Friday when she directed Orr to withdraw the bankruptcy petition and said it violated Michigan's constitutional protection of retirement benefits.
Orr made the decision to file for chapter 9 bankruptcy protection last Thursday after failing to reach agreement with the city's creditors and pension funds over the city's $18bn-plus debts.
The filing puts at risk benefits now being paid to former city firemen, policemen and others in a move that is being closely watched by other cities struggling to keep up with escalating pension costs. Detroit's 100,000 creditors are also expected to lose money.
Aquilina last week expressed "very serious concerns" and the "rush to bankruptcy court." Aquilina said: "Plaintiffs shouldn't have been blindsided."
Pension funds have asked for a halt to all bankruptcy hearings until the case in Ingham County is resolved.
On Monday, Aquilina adjourned a hearing in another case brought by city pension funds to 29 June. "This is a very important issue," she said. "I understand that there may be this question of moving it to federal court … but these are state issues. We're dealing with the state constitution and an emergency manager who is a product of the state legislation."
"As you all know, my decision last week was because there's been a violation of constitution. I don't believe the constitution should be made of swiss cheese," she said.
Some Detroit bonds have risen to three-month highs on bets that Orr's plan to give bondholders less than 20¢ on the dollar won't hold up in bankruptcy court. Experts said the bankruptcy court may end up cutting investors a better deal than the emergency manager had first offered at the expense of the city's retirees.
Alan Schankel, head of fixed-income research at bond specialist Janney Capital Markets, said that with the backing of the state it looked all but certain that the bankruptcy filing would proceed. "This will be a very negative experience for the city," said Schankel. "I don't think it will come out of it as well as it would have had the parties agreed to the emergency manager's plan that he set out in June."
He said that pensions and other benefits were certain to be cut and that bond holders could end getting more from the courts than Orr had originally offered before he filed for bankruptcy.
The bankruptcy could take "at least a couple of years" to wind its way through the court and could have a major impact on the ability of other cities to raise money, especially those in Michigan or those with poor credit ratings, Schankel said.
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