Detroit Bankruptcy Judge: Pension Ruling Was “Not Particularly Difficult” Decision


U.S. Bankruptcy Judge Steven Rhodes – the judge that authorized Detroit’s pension cuts as part of its bankruptcy plan – said this week that, from a legal standpoint, the decision to let the city cut pensions was “not particularly difficult”.

But from a personal standpoint the cuts were more difficult, according to Rhodes.

Here’s what Rhodes had to say about the ruling, according to the Detroit Free Press:

Michigan’s Constitution describes public pensions as a contractual obligation that cannot be cut, but federal bankruptcy law allows contracts to be severed.

“I have to say that from a legal perspective, it was not a particularly difficult decision,” he said.


He felt still compassion for the city’s retirees and citizens who suffered because of the city’s financial collapse and water shutoffs.

Rhodes, who presided over the largest municipal bankruptcy in U.S. history from start to finish, told WDET’s “Detroit Today” that he invited citizens to speak in his courtroom on multiple occasions during the case because he wanted to hear their input.

“It wasn’t just show. It wasn’t just me trying to persuade people that I’m fair,” he said. “I was genuinely interested in what their concerns were and how I could possibly deal with them, if I could. So that was important to me.”

Rhodes also said in the interview that Detroit should have filed for bankruptcy as early as 2005.

Read the full interview here.


Photo credit: “DavidStottsitsamongDetroittowers” by Mikerussell – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

Detroit Retiree Committee Explains Decision to Support Pension Cuts

Detroit, Michigan

When Detroit initially announced its plans to cut back worker pensions earlier this year, the Detroit Retiree Committee took a hard line: the cuts were unconstitutional and the Committee wouldn’t support them.

But the Committee eventually backed down, and retirees easily approved the pension cuts at the ballot box.

What caused the Committee to reverse course? Today, during testimony at Detroit’s bankruptcy trial, we got a glimpse of the behind-the-scenes decision-making that led to the change in sentiment. From the Detroit Free Press:

“Part of the test of whether Detroit’s plan would be successful was whether Detroit could be able to revitalize itself,” [Committee member Ron] Bloom said. “Anything we put forward, we had to feel in good faith was consistent with Detroit being able to revitalize itself.

“The city was dysfunctional. We didn’t like what they had to say often, but we felt their commitment to revitalization was sincere.”


The Retiree Committee agreed to endorse the plan ahead of a July vote by retirees. Retirees and workers voted in support of the plan.

Early on, the committee “had a pretty vigorous disagreement with how we thought the case should go,” Bloom said, adding that the retirees were never treated like favored insiders among the city’s creditors.

But as realities of the case set in, and it became clear pension cuts could be worse if retirees rejected the plan, the committee decided to back the plan.

“We believe that we received enough,” Bloom testified.

The restructuring plan, eventually endorsed by the Committee and approved by retirees, eliminated COLA increases and cut pensions by 4.5 percent.


Photo Credit: Mikerussell – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

Could Detroit-Style Cuts Come to California?


Pension benefits, once thought safe, now stand on shakier footing than they ever have. Detroit’s citizens live in a state where pensions are protected by the Constitution, but that didn’t matter when a bankruptcy judge ruled that the city could cut worker pensions as part of its bankruptcy restructuring plan.

California workers are now wondering what this all means for them—particularly the workers in the bankrupt cities of Stockton and San Bernardino. The state heavily protects its pension benefits, present and future.

Still, the question on everyone’s mind is: Could Detroit-style pension cuts come to California? Ed Mendel explored that question in a post today on CalPensions:

U.S. Bankruptcy Judge Steven Rhodes, acting earlier than expected, ruled last December that Detroit pensions can be cut, even though the Michigan constitution says pensions are a “contractual obligation” that can’t be “diminished or impaired.”

The ruling that federal bankruptcy law allowing contract impairment overrides state law was appealed by unions. But the early ruling, along with potential loss of “grand bargain” financial aid, may have added to fear of deep pension cuts, influencing the vote.

A cut of 4.5 percent in active and retired general worker pensions and the elimination of cost-of-living adjustments was approved by 73 percent of voters. Leaving police and firefighter pensions intact but trimming their COLAs from 2.25 to 1 percent was approved by 82 percent.

In a brief supporting the appeal of Judge Rhodes’ ruling, CalPERS argued, among other things, that Detroit has a city-run plan and that an “arm of the state” like CalPERS cannot under federal bankruptcy law be impaired in a municipal bankruptcy.

The judge handling the Stockton case, U.S. Bankruptcy Judge Christopher Klein, has said one of his options is ruling on the general issue of whether CalPERS pensions can be cut without necessarily finding that Stockton pensions should be cut.

CalPERS filed the brief in question shortly after the Detroit ruling. The premise of CalPERS argument was that the Detroit ruling didn’t apply to them because Detroit is a city, while CalPERS operates on the state level.

But as Mendel points out, there are a few key similarities between Detroit‘s bankruptcy and those of California. From CalPensions:

Although differing on pensions, the Detroit and Stockton plans to exit bankruptcy are similar on retiree health care. Detroit announced last week that a 90 percent cut in retiree health care was approved by 88 percent of voters.

Judge Klein ruled in 2012 that retiree health care can be cut in bankruptcy, acknowledging the result may be “tragic hardships” for some. A Stockton retiree health care debt of $544 million was reduced to a one-time payment of $5.1 million.

Another similarity is that the Detroit and Stockton “plans of adjustment” to cut debt and exit bankruptcy face challenges from bondholders. Making little or no reduction in massive pension debt, but deep cuts in bond payments, is said to be unfair.

What happens in California will have a ripple effect across the country as cities nationwide are increasingly weighing the prospect of going through municipal bankruptcy proceedings. The judges presiding over these cases will be wading in uncharted waters—and their word will be law. Pension360 will be following subsequent developments closely.

Detroit’s Pension-Slashing Plan Passed, But Creditors Remain the City’s Biggest Obstacle


When Detroit bankruptcy judge Steven Rhodes considers whether to approve the city’s sweeping debt-cutting plan, he will take into strong consideration what the city’s voters had to say. He’ll see that Detroit’s pension holders overwhelmingly approved the ballot measure today which cut pension benefits and cost-of-living-adjustments, among other things.

But he’ll also see the discontent coming from another group receiving much less media attention: Detroit’s creditors. Those include banks, hedge funds, individual investors and average Detroit citizens who hold the city’s bonds, which have become worthless. Some of these bondholders are going to be paid back in full, but others won’t; Detroit is offering as little as 10 cents on the dollar to investors who own certain bond classes.

Needless to say, the owners of those bonds aren’t happy. And they expressed that discontent by voting “no” on the ballot measure that passed today. Still, Judge Rhodes will consider their opinions when ruling whether Detroit’s restructuring plan is legal.

There are twelve classes of bonds, and the Detroit Free Press has a fantastic breakdown of how those classes voted and their unique situations. You can read the whole thing here, but here are some of the more interesting ones:

Class 1: Water and sewer bondholders

Who owns or controls this debt? Major bond insurers, individuals and financial giants such as Black Rock

What they’re owed: $5.8 billion

The city’s offer: 100%

Back story: This debt is secured, which means it’s protected from cuts. Nonetheless, mediation talks between the city and the bondholders have tarried without a settlement. Why? Because the city is trying to replace the bonds without paying all future interest.

How they voted: 119 sub-classes of bondholders voted no, while 32 voted yes.

Classes 2-4, 6: Secured general obligation bonds, other secured claims, U.S. Housing and Urban Development loans, parking bonds

Who owns or controls this debt? A variety of investors (Classes 2-3, 6); Uncle Sam (Class 4)

What they’re owed: $494 million (Classes 2-3); $90 million (Class 4); $8 million (Class 6)

The city’s offer: 100%

Back story: This debt has rock-solid legal standing and the city can’t get out of it.

How they voted: These creditors don’t vote because they are receiving full payment.

Class 7: Limited-tax general obligation bonds

Who owns or controls this debt? Ambac Assurance and Black Rock control most of it, with Syncora holding a smaller amount.

What they’re owed: $164 million

The city’s offer: 34%

Back story: Black Rock and Ambac agreed to a tentative settlement, but all of the terms have not been released.

How they voted: Bondholders representing 99.8% of the claims and the votes rejected the plan — likely because the settlement has not been finalized.

Class 8: Unlimited-tax general obligation bonds

Who owns or controls this debt? The lion’s share is controlled by bond insurers Assured, Ambac and National Public Finance Guarantee.

What they’re owed: $388 million

The city’s offer: 74%

Back story: The bond insurers agreed to a deal to allow the city to divert 26% of their debt to low-income retirees who face pension cuts. But this deal will face legal challenges during the trial.

How they voted: 87% of bondholders representing 97% of the debt voted “yes” to approve the deal.

Class 9: Pension obligation certificates of participation (COPs)

Who owns or controls this debt? Syncora and FGIC insured the debt, which is mostly owned by European banks and five major hedge funds that recently acquired about half of it

What they’re owed: $1.473 billion

The city’s offer: 0% to 10%

Back story: The fiercest fight in the bankruptcy is here. Syncora and FGIC argue they are being unfairly treated and have pushed for the City of Detroit to consider selling Detroit Institute of Arts treasures to pay their debts. The hedge funds have also objected to the city’s proposal.

How they voted: It was an emphatic “no,” with not a single “yes” vote.

Class 10: Police and Fire Retirement System pensions

Who owns or controls this debt? Police and fire retirees and active uniform employees who are vested in their pensions

What they’re owed: $1.25 billion in unfunded future pension promises

The city’s offer: 100% payment of their monthly pension checks and a reduction in annual cost-of-living adjustment (COLA) increases from 2.25% to 1%.

Back story: The U.S. government-appointed Official Committee of Retirees, a major retiree association and the pension board representing the police and fire retirees reached a deal with the city to recommend a “yes” vote. With a “yes” vote by Classes 10 and 11, the city would agree to transfer the DIA to an independent charitable trust in exchange for foundation, state and DIA donations directed toward pensions.

How they voted: 82% of police and fire pensioners representing 82% of the debt voted “yes” to support the deal.

Class 14: Other unsecured claims

Who owns or controls this debt? A variety of creditors, including people who sued the city and won settlements, as well as city vendors that had contracts canceled

What they’re owed: An estimated $150 million

The city’s offer: 10% to 13%

Where they stand: This group of creditors is not well coordinated, but it includes a major Macomb County water claim expected to vote no.

How they voted: This class voted no by a 53-47% margin in number and by a 61-39% margin in total claims.

There are two ways this could play out:

1) Detroit reaches a settlement with creditors, likely paying them around 10 cents on the dollar for many of their bonds.

And, if a settlement can’t be reached:

2) Judge Rhodes will determine whether to force the creditors to accept cuts.

The trial starts next month, but likely won’t be finished until September.

Detroit Voters Pass Pension Cuts By A Landslide

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The long-awaited news has finally come: Detroit’s pension holders have approved a ballot measure that cuts their pension benefits as part of the city’s bankruptcy plan. There was much speculation about whether the measure would pass. In the end, though, it wasn’t even close. The Wall Street Journal had the final tally:

The official count, filed late Monday night, showed 82% of those eligible for a police or fire pension who voted supported the plan. Roughly 73% of other retirees and employees with pension benefits who voted favored the plan. Voting lasted through early July.
The voting margins from pension holders were seen as an endorsement for the city’s plan to confront an estimated $18 billion in long-term obligations.
“The voting shows strong support for the City’s plan to adjust its debts and for the investment necessary to provide essential services and put Detroit on secure financial footing,” Detroit Emergency Manager Kevyn Orr said.
Despite the critical nature of the vote, a sizable chunk of those eligible sat out. About 59% of police and firefighter pension holders and 42% of other pension holders cast ballots, according to the city’s legal filing.

Need a recap of what exactly the “yes” vote means? Here’s an explanation from Click On Detroit:

General retirees would get a 4.5 percent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose a portion of their annual cost-of-living raise.
Ballot approval of the pension changes triggers an extraordinary $816 million bailout from the state of Michigan, foundations and the Detroit Institute of Arts. The money would prevent the sale of city-owned art and avoid deeper pension cuts. The judge, however, still must agree.

That last line is key: the city’s bankruptcy judge still has to OK the plan. But it was always assumed that if voters passed it, the judge would too.

To read the official declaration released by the bankruptcy court, click here.

Insiders Say Detroit’s Pension-Slashing Ballot Measure On Track To Pass

The ballots have been cast and the votes have been counted. And although Detroit officials are remaining silent on the results of the all-important pension-cutting ballot measure, a few leaks have made their way to media outlets. The consensus: the measure has enough “yes” votes to pass, according to the Detroit Free Press:

Detroit pensioners appear to have voted in favor of allowing the city to cut their monthly checks as part of the grand bargain to help resolve the city’s Chapter 9 bankruptcy, several sources familiar with the voting results told the Free Press.

Police and fire pensioners appeared to have accepted the deal by a wide margin, and while the vote was closer with civilian retirees, only an unexpected last-minute surge of “no” votes would derail the plan, according to people familiar with the voting results.

The city’s pensioners had until 5 PM last Friday to vote on the proposed measure to cut their pensions by 4.5 percent and eliminate future COLA increases. Those cuts are hard to stomach for some, but Detroit maintains that a “yes” vote would stave off even deeper cuts. The implications of a “yes” vote, according to the Detroit Free Press:

If the two separate classes of pensioners [public safety workers and civilian pensioners] vote yes, the City of Detroit would accept $195 million in upfront cash from the State of Michigan and $466 million in 20-year pledges from nonprofit foundations and the Detroit Institute of Arts to help reduce pension cuts and allow the museum to spin off. The deal for pensioners and the DIA has come to be known as the grand bargain.

If voters reject the measure, those cash infusions from the state and nonprofits fall through. That means that even deeper cuts in pension benefits will likely be necessary. Detroit Emergency Manager Kevyn Orr had originally proposed cutting pension benefits by up to 34 percent.

But it doesn’t look like that will be the case. From Freep:

Sources familiar with the vote said that although ballots mailed at the last minute have not yet been tabulated, a high percentage of public safety pensioners — classified under the Police and Fire Retirement System class — voted yes to accept a reduction in annual pension inflation adjustments from 2.25% to 1%.

It’s closer among civilian pensioners — classified under the General Retirement System class — the sources said.

Two people familiar with the situation said that with last-minute votes yet to be counted, more than 70% of GRS [General Retirement System] voters had voted yes.

The plot thickens just a bit here, because a simple majority isn’t enough to pass this measure. There are two classes of voters: public safety workers and civilian workers. Both classes must have a majority of “yes” votes. And the “yes” votes from each class must represent at least two-thirds of the dollar value of the debt owed to them.

The results of the vote don’t have to be publicly revealed until July 21. But even then, the measure can’t yet go into law. It needs to be first approved by a bankruptcy judge.

Pension shocker: Judge rules Detroit can cut pensions

In a pension shot heard ‘round the world, a ruling has come down in Detroit’s bankruptcy case that will have implications far beyond the city’s limits: in a surprise decision, U.S. Bankruptcy Judge Steven Rhodes has ruled that pensions can legally be cut during the city’s bankruptcy process.

Kevyn Orr, Detroit’s emergency manager, has said in the past that significant pension cuts for both current and retired workers will be necessary to dig the city out of its financial hole. But pensions are heavily protected in Michigan, thanks to a provision in the state constitution that categorizes public pensions as “contractual obligations” which are protected from being “diminished or impaired” under any circumstances.

But now that’s changed.

“Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy,” Rhodes said in his ruling.

Detroit is facing the financially toxic reality of having twice as many pensioners as active employees. It remains to be seen whether (and to what extent) the city will move forward with the cuts, which are sure to be politically painful. But now, for the first time, the city has the legal go-ahead to do so.