Moody’s: Undoing Retiree Cuts Would Spell Bankruptcy For Flint

Kalamazoo, Michigan

Detroit isn’t the only Michigan city having a hard time financially. Flint, a smaller but similarly distressed city, has toyed with the idea of bankruptcy for months.

The city cut retiree benefits in an attempt to improve its fiscal condition, but a lawsuit over those cuts is waiting in the wings.

Moody’s has now said that the city is unlikely to face bankruptcy – but if retirees win their lawsuit against the city, that outlook could change. From Michigan Live:

Flint and Detroit have many similarities, but bankruptcy isn’t likely to be among them, according to an analyst with Moody’s Investors Service.

David Levett, writing in the Sept. 11 issue of U.S. Public Finance Weekly Credit Outlook, says Flint is unlikely to follow Detroit’s path into bankruptcy in the near term, especially if the courts allow the city to keep benefit cuts to retirees in place.


Earlier this year, Earley himself raised the possibility of bankruptcy for Flint if it loses a lawsuit filed by city retirees, which seeks to maintain the health benefits that workers retired with.

Levett’s analysis credits Flint’s emergency managers with having “substantially improved financial operations with dramatic changes, including restructuring pension benefits, outsourcing services, eliminating 20 percent of the city’s workforce and reducing total employee compensation equivalent to 20 percent of wages.”

He says Flint’s financial progress “would be derailed” if cuts to retiree benefits are overturned.

“The city would face substantial financial pressure should the benefit cuts not stand, increasing the likelihood of a bankruptcy filing … If the city ultimately loses the challenge, annual expenditures would increase by $5 million, equivalent to 8 percent of 2013 revenues,” the report says.

Flint Councilman Joshua Freeman was not so optimistic. In an email to Michigan Live, he said he sees “no clear path forward that does not include bankruptcy”.

Detroit Deal Leaves Pension Protection in Legal Limbo


Municipal bankruptcies are increasingly becoming a reality in the United States, and it’s changing what we know about how—and to what extent—state laws protect pension benefits.

Detroit made big waves this week when its citizens voted to cut their own pensions. But if they had not approved the ballot measure, the city would have tried to cut their benefits by even greater margins. The fact that this took place in a state with stringent legal protections for pension benefits is making observers elsewhere wonder if a new precedent has been set. From NPR:

Pension benefits already earned have always been sacrosanct, protected by federal law and, often, state constitutions. Retirees could rest easy, knowing their money couldn’t be touched.

The in Detroit by retired city workers to cut their own benefits by 4.5 percent calls all that into question.

“Detroit has raised it as a possibility,” says Daniel DiSalvo, a political scientist at City College of New York who studies public sector labor issues. “I don’t think that most people, maybe with the exception of some unions, think pensions are inviolable.”

With several other cases pending, it’s not at all clear whether federal bankruptcy law trumps traditional pension protections. Pensions continue to have strong legal protection, and there’s not going to be any great rush among states and cities to test whether cutting benefits for current retirees is something that will necessarily fly with the courts.

But the vote in Detroit does suggest that at least some pensioners might have to give up more than they ever expected.

And it won’t be too long until the possibility of more pension cuts are raised elsewhere in Michigan. Flint is considering filing for bankruptcy, as well. From Money News:

Flint, the birthplace of General Motors that once had 200,000 residents, has also endured a spectacular drop in population and factory jobs and a corresponding rise in property abandonment, much like its insolvent big brother an hour’s drive south.

If a judge rules against Flint’s effort to cut its retiree health care benefits, the city is expected to join about a dozen cities or counties that have sought help from the courts since the start of the recession.

“If we don’t get any relief in the courts … we are headed over the same cliff as Detroit,” said Darnell Earley, the emergency manager appointed by Gov. Rick Snyder to manage Flint’s finances. “We can’t even sustain the budget we have if we have to put more money into health care” for city workers.

And, if Flint follows a similar path to Detroit after declaring bankruptcy, it could mean pension benefits are the first thing on the chopping block.

This will all become a bit clearer when Detroit bankruptcy judge Steven Rhodes makes his ruling on the city’s restructuring plan. That won’t come until sometime in September.