Menu
Detroit bankruptcy ruling has nationwide implications
Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, was blunt in his assessment. “This is one of the strongest protected pension obligations in the country here in Michigan,” he said. “If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone.”
Other than the Sox beating the Tigers in the ALCS, we don’t have much to do with Detroit, but a ruling in the U.S. Bankruptcy Court yesterday on the city’s petition for Chapter 9 reorganization has implications for every state and municipal employee and retiree. Despite a provision in the Michigan Constitution that said government employee pensions could not be unilaterally reduced or modified, the bankruptcy judge ruled otherwise and now retirees from the city of Detroit are just normal creditors like the company that supplied paper clips to city hall and those who invested in the city’s bonds. Because of the Supremacy Clause in the US Constitution, in a conflict between federal law and state law, federal law wins. The bankruptcy court’s decision will be appealed and you can never prejudge an appeal, but it’s always tough to overturn the initial ruling.
Why should this matter to retirees of the city of Lowell or the Commonwealth of Massachusetts? Because as is pointed out in the New York Times article that is the source of the above quote, this is the first ruling of this type anywhere in the country and now that it is on the books, other governmental entities in distress might be tempted to seek bankruptcy court protection to wipe the slate clean and start fresh. Neither the city of Lowell nor the Commonwealth of Massachusetts appear to have any serious problems with current pension funding, but the Detroit case is a reminder that sound fiscal management at the state and municipal level is critical to the long term viability of the interests of many.
The Lowell pension system is highly dependent on the economy (invested assets), and the tanking of the stock market 5 years ago still has an effect on the required contribution by the City in order to keep on track for a 2035 full funding. Indeed, the City administration has recommended putting aside of $3M from free cash this year to smooth what would otherwise be a spike in contribution from the general fund (taxpayer).
Maybe of greater concern is the unfunded liability of the City for health care. Unlike the pension system where benefits are earned depending on length of service, retiree health care is fully earned with but 10 years of service (the minimum required for a pension). This aspect of the retiree benefit results in the 10-year service employee costing the same amount as the 40-year employee in retiree health care benefits. Since it takes four 10-year employees to make one 40-year employee, this has a four-fold effect on the cost. That has to be a major contributor to the current unfunded liability of $525 million for the City.
Although the Governor filed legislation to ease this burden on the cities with house bill 59, the Legislature apparently doesn’t have the will to make it law. If it could be eased in (apply to only new employees with full knowledge of the benefit) it may be an easier pill to swallow.
Can you imagine receiving only 16 cents on the dollar of a pension you anticipated would support you in retirement? Detroit sets a dangerous precedent for public employees whose municipalities or states are kicking pension funding down the road. Thank God Lowell’s professional city manager Bernie Lynch is recommending that $3 million from free cash be used to fund pensions. Planning and foresight, understanding the numbers and responding appropriately, I really appreciate our professional city management team.
Can’t imagine why Rodney Elliott and company would even consider not offering Bernie and team new contracts in August. They’ve brought us a very long way indeed from the bad old fiscally irresponsible days of 2006 to the A1 and AA+ Moody’s and Standard and Poors credit ratings of 2013. Hope we’re smart enough as a city to reward excellent performance with new contracts come August.
Keeping Lowell’s pensions funded without further burdening taxpayers is just the latest excellent decision by this professional administration. Looking forward to many more years of excellent decision making from Bernie and his team.