Detroit pensioner Yvonne Jones, 63, of Detroit attends an informational meeting at Fellowship Chapel in Detroit on Thursday to hear more about the city’s grand bargain pension plan and the ongoing vote. Jones says she will vote no. / Mandi Wright/Detroit Free Press
Among the many questions facing retirees and pension beneficiaries as they vote on Detroit’s bankruptcy grand bargain is one often asked: Aren’t retirees better off rejecting the deal they don’t like and betting on a court appeal to force the city or the state to pay full benefits?
It’s a risk Yvonne Jones, 63, says she’s willing to take — although it’s a risk that emergency manager Kevyn Orr and many experts say is a long shot and fraught with the danger of even deeper cuts.
Jones says that she’s definitely going to reject the plan because she doesn’t believe that city pensions should be cut at all in the bankruptcy process.
“To accept it says we give up all rights to litigate,” Jones said last week. She retired as a manager in the city’s old employment and training department in 2001. “The court cases go away.”
Jones said she has lived in Detroit all her life, raised four kids and agrees that Detroit has issues. But she doesn’t believe it’s right for retirees to see more cuts on top of higher health care costs that have already taken place.
“This intimidation is wrong,” she said. “I’m not ready to take any cut. I’m fighting to take no cuts.”
Among the avenues on which retirees opposed to the deal might pin their hopes are appeals that the Official Committee of Retirees and labor unions — including the city’s largest, the the American Federation of State, County and Municipal Employees — filed objecting to the city’s eligibility to file for bankruptcy.
U.S. Bankruptcy Judge Steven Rhodes in December ruled Detroit met eligibility requirements and that federal bankruptcy law trumps Michigan’s constitution. He later allowed unions and retirees to appeal his decision to the U.S. 6th Circuit Court of Appeals in Cincinnati. That appeal, and the right to pursue any other avenue, would be waived if retirees accept the grand bargain.
Why should retirees and pension beneficiaries not bet on an appeal?
Orr said retirees are misinformed if they believe there’s a chance of more money for pensioners down the line if they vote no. Orr said Friday that Detroit doesn’t have the money to pay more to retirees, noting that the city has over recent years deferred $600 million in pension payments.
Orr said he sees no scenario under which a pool of money for pensions goes up, and said the $816 million pledged in the grand bargain is the best retirees will get. The aim of the grand bargain was to shield the Detroit Institute of Arts from sales of its artwork by selling the museum to a nonprofit trust and using proceeds specifically to reduce pension cuts. In the mediated deal, wealthy foundations, the state government and the DIA have agreed to raise more than $816 million in the effort.
“You can stand on principle,” Orr said, “but you’re going to take a big hit. There’s no value proposition in that.”
Two leading bankruptcy experts said banking on a successful appeal is a big gamble.
“Anytime you’re in litigation there’s a risk,” said Doug Bernstein, who leads the bankruptcy and creditors’ rights practice at the Plunkett Cooney law firm in Bloomfield Hills. “Assuming the city has the ability to execute the plan of adjustment, assuming that the plan is confirmed, you know what your treatment is going to be. If you don’t go through the plan’s confirmation process and you take your chances through litigation, you’ve got that degree of uncertainty, and it is a gamble.”
Bernstein represents the Ford Foundation, one of the donors to the grand bargain, but said he wouldn’t advocate against any city creditor, retirees included, trying to hold out for the best possible deal.
Still, he said retiree appeals face uphill odds, noting that there is precious little legal precedent on whether state protections of pensions stand up against federal bankruptcy law. In part, that’s because in municipal bankruptcies where such issues have been litigated, appeals to higher courts are generally dropped when the sides settle.
But Bernstein said rulings by federal judges also tend to withstand appeals.
“Judge Rhodes has a pretty good track record on appeal,” he said. “Every case is measured on its own merits, but in general, it is very hard to get a federal judge reversed. It happens, but lower courts get affirmed much more often than they get reversed.”
Laura Beth Bartell, a bankruptcy law professor at Wayne State University, said it would be hard to imagine a court ruling that a city couldn’t seek relief from pension liabilities if they threaten the municipality’s very existence.
“Are we saying that the municipality can’t take advantage of Chapter 9 to solve their problems? The whole idea of Chapter 9 is to help municipalities with financial problems,” Bartell said. “Kevyn Orr has said the plan doesn’t work if you have to pay 100% of pensions including cost-of-living adjustments. You can’t have a city that operates with all the money going to that.”
Retirees could seek to force a sale of DIA assets, but Orr has called that a questionable move because, even if successful, it would represent perhaps $2 billion in assets, and that money wouldn’t go only to pensions but would be shared among creditors with $12 billion in claims. Rhodes has signaled that he’s not willing to force a DIA sell-off.
Another tack, trying to go after the state to shore up underfunded pensions, also is a long shot, Bartell said. While Michigan Attorney General Bill Schuette has pledged to defend the state’s constitutional protections of pensions in Detroit’s bankruptcy, Bartell said previous state attorneys general have found nonetheless that cities cannot expect state bailouts of local pension funds. She suspects Schuette would agree.
How does the vote itself work? How will the votes be counted?
The bankruptcy format for voting might be confusing to some. But it’s designed to try to make voting fair for creditors.
Two calculations come into play. First, a majority of the pensioners who cast ballots must approve the city’s pension cut plan in order for the smaller cuts to take effect. In this way, all pensions would be treated equally because the “yes” or “no” majority will be determined by all of those voting.
But it’s not enough for a simple majority to vote yes in a bankruptcy. For the plan of adjustment to go through, the yes votes must represent at least two-thirds of the amount of pension claims — the full value of pensions — of those who cast ballots.
So, technically, a pensioner or active worker with a larger pension is indeed “worth” more than someone with a smaller claim.
Wayne State’s Bartell said the reason why there are two parts to the test is to create a level of fairness.
“The ‘majority in number’ test treats everyone the same, and each vote has the same weight,” Bartell said. “The ‘two-thirds in amount’ test gives more weight to bigger claims. The test is intended to be fair to both small claims and to larger claims. Every vote matters.”
The vote is tabulated based on the number of class members who actually vote, not how many ballots are sent out. If a ballot is not mailed in time or a vote is not cast, it does not count as a yes or a no.
Why is it necessary for both classes, uniform and nonuniform, to agree to the deal?
In bankruptcy, police and fire are called Class 10. The general retirement retirees are called Class 11.
Both classes must vote in favor of the plan for the outside funding to be available. That is a key part of the deal: Both groups must approve the plan of adjustment.
But if one class or both classes reject the plan, the outside funding for pensions will not be available. And the cuts would be deeper, according to the Orr’s team. Many observers say foundations do not want to be associated with any possible “cram-down,” in which Rhodes might force deeper pension cuts if both pension system classes reject the plan.
If the plan is approved, general retirees will have a 4.5% cut to pension checks.
If it’s rejected, general retirees would face a 27% cut, or $5,400 a year on a current $20,000 annual pension.
Regardless of the vote, cost-of-living adjustments for general retirees are going away.
Regardless of the vote, the city plans to recoup excess interest paid from annuity savings plans to general retirees paid out from July 1, 2003, to June 30, 2013.
The big question before police and fire retirees, beneficiaries and active workers: How deep will the cut to cost-of-living adjustments go? If both sets of pension creditors reject the plan, COLA would be eliminated for police and fire. But if both classes vote in favor, annual COLA for police and fire would be reduced by about 55%.
What does it mean when the emergency manager says we’d have to go back to square one, if one or both classes vote no?
While the city has proposed a Plan B with more severe cuts if retirees reject the grand bargain, Orr said Friday that “no” votes would undo deals reached with other creditors, too.
“Given what we’ve seen by some of our opponents, if Plan A fails they’ll have arguments that we should start back with a plan that treats all creditors fairly,” Orr said.
In other words, the comparatively generous treatment of pensioners vs. other unsecured creditors would be off the table.
And settlements with bondholders and others so far “fail, too, because they’re contingent on the funds from the grand bargain being there,” Orr said. “They have an argument that what they agreed to isn’t there.”
Orr spokesman Bill Nowling said that the city will still pursue excess payments in the annuity savings in the event of a no vote. But if the deal is rejected, retirees would not be protected by a current limit on how much annuity savings money the city would take back in its clawback. The cap or limit would go away if retirees reject the plan and clawback cuts could be deeper.
“There would basically be no plan. That is the nature of the grand bargain. There is no piecemeal,” Nowling said.