Retired City Workers Accept Cuts (As Does Everybody Else) in Detroit’s Bankruptcy

A judge has approved Detroit’s
plan eliminating $7 billion (out of $18 billion) in debt as part of
its
bankruptcy reorganization. Some will be getting just a pittance
of what they’re owed from the city. Bond insurer Syncora Guarantee
will be getting just 14 cents for every dollar Detroit owes
them.

But unlike what just happened recently in bankrupt
Stockton, California, public sector employees and retirees have
also agreed to cuts. Retirees voted for to approve a 4.5 percent
cut in their pensions, much bigger cuts to health care coverage and
an end to cost-of-living increases.

While the competently handled bankruptcy plan is being presented
as a sort of a success story (and a well-managed bankruptcy as a
success story says a lot about Detroit) there still may be
lingering storms on the horizon. As the
New York Times notes, city employees accepted pension
cuts but didn’t want to change the assumptions regarding how much
pension funds would earn in returns. As is unfortunately common,
public employee pensions offer unrealistically high returns. A
fiscal policy expert bankruptcy Judge Steven Rhodes hired to
analyze the proposal wanted to bring it down:

To get one group of creditors to accept a settlement, Detroit’s
negotiators sometimes had to reduce what was available to satisfy
others. To make pension cuts acceptable to retirees, for example,
the city based its exit strategy on an assumption that pension
investments would earn average annual returns of 6.75 percent,
something Ms. [Martha] Kopacz said was too aggressive for a fragile
city that could not afford investment losses.

“I would make it 5 percent if I ruled the world,” she said at
one point during the bankruptcy trial, under questioning by Judge
Rhodes.

The assumed rate of return gave the retirees something to hope
for — the possibility that even better results from the pension
investments than the 6.75 percent assumed by the city would show
that cuts were not needed after all and that a new deal could be
negotiated with the cuts reversed. But if the pension investments
do not produce the returns needed, the city will have to make up
the missing money.

There are many reasons why public employee pensions have caused
crises for state and municipal governments. Overly generous
assumptions is one of the big ones.

Detroit’s Institute for the Arts has also been
preserved and is now owned by a charitable trust rather than
the city of Detroit. The museum, with its extremely valuable
collection, had been eyed as a way to reduce the city’s debt. But a
massive fundraising drive, including a $200 million subsidy from
the state of Michigan, helped protect it. Reason’s Shikha Dalmia

criticized the bailout plan back in January, but at least the
subsidy ended up being less than the $350 million proposed at the
time.