A new agreement with the city of Detroit could potentially be a very big deal, at least politically. Trying to climb out from under a fiscal collapse, the city managers had to restructure the massive pensions to eliminate or at least greatly reduce the debt overhang — but cutting pensions to first responders was highly unpopular. City managers got those retirees on board with their restructuring plans by protecting their benefits while cutting those of others, essentially splitting the opposition, but there is a huge caveat involved (via Ron Fournier):
Detroit has reached a deal with some retired workers over pension benefits, but cut monthly payments for other former employees, in a move that could give a boost to the city’s plan to exit bankruptcy in October, officials said Tuesday.
According to tentative agreements, retired police officers and firefighters will continue to receive their pensions while those who do not work in public safety will have some of their benefits scrapped.
There will be a 4.5 percent cut and an elimination of the cost-of- living payments for the general fund pensioners, said Tina Basset, spokesperson for the fund.
The agreement will cover more than 20,000 retired workers in a city going through one of the largest public bankruptcies in U.S. history. Both the retirees, as well as current workers who qualify for a future pension, will be allowed to vote as creditors in the bankruptcy.
How will Detroit fund these pensions? That’s been the problem all along, and not just in Detroit. Across the US, cities and states have massive pension overhangs thanks to defined-benefit plans that never got properly funded, rather than defined-contribution plans that get funded up front. That’s a major part of the debt Detroit is attempting to shed, although not the only component of it.
The answer? Detroit needs a bailout, and they’re not getting it from the federal government. Or will it?
Michigan officials and President Barack Obama’s Administration are discussing a plan to free up $100 million in federal money to aid Detroit’s retired city workers, the Detroit Free Press reported on Tuesday.
Citing two people familiar with the talks, the newspaper said the talks were centered around federal money flowing to Michigan for blight removal. Under the plan, $100 million would be earmarked for Detroit, reducing the $500 million the city’s emergency manager, Kevyn Orr, plans to use to eliminate blight over the next 10 years.
The $100 million saved could then be used by Orr to ease pension cuts for retirees under the city’s plan to adjust its $18 billion of debt and exit the biggest municipal bankruptcy in U.S. history, according to the report.
That’s the best the White House can do without going to Congress — and the House won’t rush to bail out Detroit with federal money, no matter what that might mean for Michigan Republicans.
In case that doesn’t work out, Detroit is trying to raise the money from the state of Michigan and private donations. This deal depends on raising nearly a billion dollars for its bailout, mainly to keep the city’s art collection. In order for that deal to go through, Detroit had to cut a deal with its pensioners to get the bankruptcy court on board:
If completed, the agreements with the pension funds and with a group representing 6,500 retired police officers and firefighters seemed certain to provide Detroit’s blueprint for paying off portions of its debt, known as a plan of adjustment, with a simpler journey through court. They may also offer a political boost to the city’s plan in the eyes of the public. In Detroit, retired municipal workers make about $19,000 a year on average from pension payments, pension fund officials say, and retired police officers and firefighters, who do not get Social Security benefits, receive about $32,000 a year.
Support from the pension funds and some retirees should also help solidify an unusual arrangement that has become a central piece of the city’s plan for starting over: Some $800 million from charitable foundations and the state would go to retiree pensions in an effort to retain the collection at the Detroit Institute of Arts. As a stipulation for that arrangement to go forward, though, retirees have to agree to the city’s overall plan. Still unanswered is whether state lawmakers will agree to contribute their share of the money, $350 million.
The deal will cut further into retiree health coverage than previously thought, however:
The city, which filed for bankruptcy last July, has proposed shedding nearly $10 billion in unfunded liabilities in the largest municipal bankruptcy ever. More than $3 billion of that gap was the estimated underfunding in pension funds.
The biggest liability on Detroit’s books is the cost of health care for current and future retirees and their families. And retirees are likely to see deeper cuts in their original coverage as part of this deal. Bankruptcy court mediators said Tuesday a fund would be established for retiree health care costs but did provide details.
Detroit’s officials claim that the renaissance is right around the corner. But that will only be true if the city learns from its lessons over the last 50-plus years and avoids the kind of irrational pension debt and cronyism that eventually sunk Motor City. And other cities and states had better learn those lessons, too — and fast.