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

Illinois Gov. Rauner’s Municipal Bankruptcy Plan Faces Obstacles

Bruce Rauner

Last week, Illinois Gov. Bruce Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

The idea is that even if towns and cities don’t follow through, the threat of bankruptcy could give them leverage in pension negotiations with workers.

But the proposal, if it ever comes to fruition, will face legal and political obstacles, according to an analysis by Bond Buyer:

Illinois statutes don’t grant any general legal authority allowing for a Chapter 9 filing, said municipal bankruptcy expert James Spiotto, a managing director at Chapman Strategic Advisors LLC. The one exemption is for the Illinois Power Agency.

The state offers assistance for stressed communities with a population under 25,000 through its Fiscally Distressed City Act. The local government must ask the General Assembly for the appointment of a special commission to consider whether the municipality meets the act’s criteria. If approved, the municipality can qualify for state financing assistance.

Spiotto said the establishment of a Chapter 9 provision could offer some benefits, but he cautioned it should be used as a last resort when all alternatives are exhausted. Any statute best serves a state and its local governments when it includes additional layers of review and is written with market access in mind.


Municipal Market Analytics partner Matt Fabian said given unions’ historically strong influence on the Democratic majority in the state, he thinks a Chapter 9 law faces a dim chances.

“In Illinois, it’s unlikely that a bankruptcy law would be passed, and even more unlikely that what might be passed would protect bondholders over employees,” Fabian said. “The cost of capital would very likely rise.” Illinois’ local governments already pay interest rate penalties for the financial distressed of the state government.

Read the full Bond Buyer piece here.


By Steven Vance [CC-BY-2.0 (], via Wikimedia Commons

Illinois Gov. Rauner Proposes Bankruptcy As Strategy for Taming Municipal Pension Debt


Illinois Gov. Bruce Rauner didn’t touch on pensions during his State of the State address this week.

But in a list of policy proposals handed out to lawmakers, Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

Even if towns and cities didn’t act, the threat of bankruptcy could give them leverage in pension negotiations with workers.

From the Chicago Tribune:

Gov. Bruce Rauner wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations.


Rauner aides would not elaborate on how it might work.

But the single sentence calling for the state to “extend to municipalities bankruptcy protections to help turn around struggling communities” mirrors a proposed law introduced last month by state Rep. Ron Sandack, R-Downers Grove. Sandack said his aim was to give cities more tools for getting their financial affairs in order, including a “level field” when negotiating over pensions.

Federal law only allows municipalities to file for bankruptcy with explicit permission from the state where they are located, said James Spiotto, a municipal bankruptcy expert and attorney who is managing director of Chicago-based Chapman Strategic Advisors.

Currently, only the Illinois Power Agency has been given such authority. It would take passage of a new state law to extend the authority to municipalities.

Chicago Mayor Rahm Emanuel was quick to dismiss the idea that the city would use such a tactic to lower its pension costs, according to the Tribune.

Settling Pension Lawsuit Is Top Priority for Raimondo

Gina Raimondo

When Rhode Island Governor-elect Gina Raimondo takes office this month, one of her top priorities will be negotiating a settlement with public employee unions in the lawsuit challenging the state’s 2011 pension changes.

From the Providence Journal:

Days away from taking the oath of office that will make her the first female governor of Rhode Island, Governor-elect Gina Raimondo anticipates that public-employee pensions will be one of the first big items she tackles. Again.

Specifically, she anticipates “early” action to try to forge a settlement in the state’s high-stakes legal fight with its public-employee unions over the 2011 pension overhaul she crafted as state treasurer. “It is a priority,” she said.


With the state already facing a potential $200-million deficit, she said: “It is in no one’s interest to have a pension system which is unaffordable and unsustainable because, if you do that, a lot of people will get hurt.”

“So I will be reaching out,” she said Wednesday in a brief but wide-ranging interview in which she confirmed her intent to try to reopen the pension talks and, in the interim, ask lawmakers to extend the Feb. 5 deadline for the submission of her first budget proposal.


“A lot of work and good will went into the terms of the settlement agreement,” said Raimondo, who hopes to revive it. “It gives them peace of mind that their pension will be there … and that it is affordable for the state of Rhode Island.”

Should the state lose the lawsuit, “there would almost certainly be a number of municipal bankruptcies … [and] if we don’t fix the system, eventually you are going to have to go to retired people and cut their pensions … and that would be a terrible thing.”

Raimondo spearheaded the state’s 2011 pension changes, which cut benefits, froze COLAs and raised the retirement age.


Photo by By Jim Jones (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons

Michigan’s $195 Million Payment to Detroit Pension Systems Approved


A board on Monday approved a $195 million payment that Michigan will make to Detroit’s pension system as part of the city’s plan to avoid steeper benefit cuts.

From the Lansing State Journal:

Detroit’s two pension funds are expected to receive the state’s “grand bargain” bankruptcy contribution of $194.8 million on Feb. 9 after a state panel gave final approval to the payments on Monday.

The three-member Michigan Settlement Administration Authority approved the payments after board members were advised all legal claims against the state related to the largest municipal bankruptcy in the nation’s history had been dismissed.

The authority — made up of Treasurer Kevin Clinton, Budget Director John Roberts, and Huntington Woods attorney William Cohen — is not expected to meet again. Its sole function was to oversee payment of the state’s contribution to a grand bargain that helped settle the bankruptcy. The Legislature approved the payments last May.

The state’s contribution is part of more than $800 million raised from foundations, private donors and the Detroit Institute of Arts to shore up city pension funds and protect a sell-off of the DIA’s collection of artwork during Detroit’s Chapter 9 proceedings, which ended this month.


The money will go into the investment funds of the two pension funds.

The state is financing the payments from a fund established from money it received through the settlement of a multi-state lawsuit against tobacco companies.

Detroit will reportedly receive the money on February 9.


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

Major Creditor Comes Out Against San Bernardino Bankruptcy Plan That Fully Pays CalPERS

California flag

A major creditor of bankrupt San Bernardino told Reuters Thursday that it would oppose a bankruptcy plan that mandates the city keep paying CalPERS in full.

San Bernardino’s current plan doesn’t disrupt payments to CalPERS and keeps pensions intact.

The creditor has not been identified.

From Reuters:

A major capital markets creditor of bankrupt San Bernardino, California, will oppose any exit plan that is more favorable to Calpers, California’s public pension fund, a source familiar with the creditor’s strategy said on Thursday.

The creditor intends to pursue a new approach when hearings resume next year, in light of a deal the city reached with Calpers in November that will see the pension fund paid in full under a bankruptcy plan. The city has been ordered to produce a plan by May.

“We will strongly resist a plan that treats its pension claims substantially better than our claim,” the source involved in the creditor’s San Bernardino strategy said, who spoke on the condition of anonymity because negotiations with San Bernardino are subject to a judicial gag order.

The move is significant because all the capital market creditors have so far supported the bankruptcy and it signals a change in course, speaking to the wider fight between Wall Street and pension funds over how they are treated in municipal bankruptcies.

San Bernardino declared bankruptcy in July of 2012.

California Attorney: Bankruptcy “Not a Practical or Desirable” Way To Cut Pensions

scissors cutting dollar bill in half

Teague Paterson, an attorney from Sacramento specializing in labor law, has penned a column in Monday’s Sacramento Bee in which he explains his position that bankruptcy is “not a practical or desirable” way to cut pension benefits.

From the column:

Imagine for a moment that you have run into deep financial trouble and have decided to file for bankruptcy protection. Your credit rating plummets, your home is sold at a fire sale, and you can’t rent an apartment or buy a car. You spend long hours at the negotiating table as creditors pick over the remains of your finances. Ultimately, you place your future in the hands of a total stranger, the bankruptcy judge.

Isn’t that a scenario that you would try to avoid at all costs?

If the consequences for an individual facing bankruptcy are devastating, the consequences for a municipality are 10 times as dangerous. Bankrupt cities face soaring crime rates, shrinking property sales, and the reduction or elimination of basic public services. It’s is not a decision that an elected official or city manager would willingly make unless there were no other options, as the decision by a bankruptcy judge presiding over Stockton’s bankruptcy makes clear.

Judge Christopher Klein’s ruling Thursday to approve Stockton’s bankruptcy plan confirms that the situation in Stockton will have little impact over the larger national debate on public pensions. Municipalities will not be filing for bankruptcy in waves in efforts to jettison pension debt.

For the very few severely distressed cities that may consider bankruptcy, the question will not be whether they can reduce pensions, but whether they should. In Stockton, the answer to that question was clear to all with a stake in Stockton’s future – and after two years of litigation that cost tens of millions of taxpayer dollars, the bankruptcy judge agreed.

Another key excerpt from the column:

Despite the media attention to cities such as Stockton and Detroit, municipal bankruptcy is exceedingly rare. According to one analysis, 13 local governments had bankruptcy filings since 2008. Five of those have been dismissed. To put it in context, there are more than 39,000 local governments in the U.S.

Although the bankruptcy process threatened to rob Stockton of its ability to make the best decisions for its residents, ultimately the judge accepted the city’s decision. In Stockton, the practicalities of running a city with an eye toward a brighter future shaped this outcome. Judge Klein acknowledged the serious and considerable pre-bankruptcy concessions accepted by Stockton’s employees, and the virtual guarantee that employees would leave to work elsewhere if Stockton reduced their compensation any further.

Stockton faced a unique set of circumstances brought on by revenue losses and a crippling national recession. Thankfully, it’s a situation that the overwhelming majority of municipalities will never have to face. As much as pension opponents would like to focus their analyses of Stockton as a blow to pension security, bankruptcy is simply not a practical or desirable option for cities dealing with pension obligations.

Read the whole piece here.


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Detroit Creditor Accuses “Agenda-Driven” Bankruptcy Mediators Of Favoring Pensioners


Another chapter has been written in the bitter fight between Detroit and one of its largest creditors, Syncora. The bond insurer has the city’s bankruptcy mediators of blatantly favoring pensioners while pushing most of the pain of the bankruptcy onto the city’s creditors.

Syncora said in a court filing today that Detroit’s grand bargain deal was “the product of agenda-driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors and, remarkably, the City itself.”

Syncora feel they are being treated unfairly in Detroit’s bankruptcy. As part of the grand bargain, public pensioners had to accept significant cuts to their benefits. But the cuts weren’t as significant as they could have been.

But much steeper cuts are being enforced elsewhere, including on Detroit’s bondholders, of which Syncora is one.

In addition to being a bondholder, Syncora insures hundreds of millions of dollars worth of pension obligation certificates of participation (COPs) issued by Detroit. Those instruments became worthless when the city declared bankruptcy.

As part of the city’s bankruptcy proceedings, Syncora stands to lose between 90 percent and 100 percent of its investment—all told, around $250 million, including the money they’ll have to pay to clients for whom Syncora had guaranteed payment from Detroit bonds. More from the Detroit Free-Press:

Bond insurer Syncora — which could lose hundreds of millions in the bankruptcy — argued that Judge Steven Rhodes must reject the city’s sweeping restructuring plan because of the “naked favoritism” of lead bankruptcy mediator Gerald Rosen and mediator Eugene Driker.

The accusations thrust the mediators into the middle of a fight between the city and Syncora that has become so bitter that Rhodes ordered the city to stop using war analogies to describe the insurer’s actions.

Rosen and Driker negotiated terms of the grand bargain, which allows the city to reduce pension cuts and transfers the DIA to a charitable trust. They helped solicit donations from nonprofit foundations, which pledged $366 million over 20 years, and convinced the DIA to contribute $100 million over 20 years from its own donors. The state of Michigan then agreed to contribute $195 million in upfront cash to the deal, which must be approved by Rhodes.

In its filing, Syncora cited several public statements by Rosen, including his statement at a press conference that the grand bargain is “about Detroit’s retirees who have given decades and decades of their lives devoted to Detroit.”

Syncora argued that Driker should have disqualified himself from mediating the grand bargain since his wife is a former member of the DIA’s board of directors.

Rosen and Driker did not immediately respond to requests seeking comment.

For a breakdown of Detroit’s plans to repay various creditors, see Pension360’s coverage here.

Oral Arguments by Pension Funds and Unions Pushed Back in Detroit Bankruptcy Hearing


When Detroit first raised the issue of cutting pension benefits for the city’s workers, unions and pension funds balked at the idea.

So when a Detroit bankruptcy court ruled that the city could indeed cut pension benefits as part of bankruptcy proceedings, several parties immediately filed appeals, including two public employee unions and one pension fund. They wanted their day in court; a chance to stand in front of a judge and make their arguments face-to-face.

That day was supposed to be Wednesday. But there will be no appeals heard that day, as the Appeals Court in question has postponed the oral arguments that were previously scheduled to be given by the Detroit Fire Fighters Association, Detroit Police Officers Association, the city’s two pension funds and the Retired Detroit Police Members Association.

The groups were going to argue that Detroit is ineligible for bankruptcy because Michigan law does not allow a city to file for bankruptcy. From Detroit News:

A federal appeals court Tuesday canceled oral arguments for two public safety unions, a retiree group and the city’s pension funds, which were trying to overturn the city’s eligibility for bankruptcy and its ability to slash pensions.

The cancellation comes one day before the groups were scheduled to deliver arguments in the U.S. 6th Circuit Court of Appeals in Cincinnati, Ohio, and following a request to delay the hearing by a city bankruptcy lawyer, who cited ongoing negotiations. The groups impacted by the cancellation are the Detroit Fire Fighters Association, Detroit Police Officers Association, the city’s two pension funds and the Retired Detroit Police Members Association.

Oral argument was set for 1:30 p.m. Wednesday and posed one last legal obstacle that could derail an Aug. 14 trial to determine whether Detroit can shed $7 billion in debt and emerge from the biggest municipal bankruptcy in U.S. history. Legal experts, however, believe appeals from pension funds, unions and retiree groups will fail and the bankruptcy case will continue to trial next month.

Robert Gordon, a lead attorney for Detroit’s retirement systems, said the appellate court’s clerk’s office called attorneys involved late Monday and informed them of the cancellation.

A spokeswoman for the Retired Detroit Police Members Association confirmed Tuesday morning the group had struck a deal with the city late Monday night to avoid Wednesday’s planned hearing. That group has argued Michigan’s emergency manager law is unconstitutional because of its similarities to a previous law voters repealed in November 2012.

Detroit has settled with most of its creditors as part of its bankruptcy proceedings. But there has been one notable holdout: Syncora Guarantee Inc, which is facing millions of dollars in potential losses due to the drastic decline in value of the Detroit bonds the corporation holds.

Photo: “DavidStottsitsamongDetroittowers” by Mikerussell – Own work. Licensed under Creative 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.