News and analysis from The Center for Michigan • http://thecenterformichigan.net
©2014 Bridge Michigan. All Rights Reserved. • Join us online at http://bridgemi.com

Original article URL: http://bridgemi.com/2013/11/retirees-sweat-as-courts-weigh-cuts-to-pension-and-health-care/

Economy & competitive position

Retirees sweat as courts weigh cuts to pension and health care

It’s a battle cry that began in Detroit and is spreading to other Michigan cities: “Don’t touch my pension.”

To that, many of the state’s retired municipal employees are adding another caveat: “And leave my medical insurance alone, too.”

With Detroit in bankruptcy court, employees and retirees of other Michigan local governments are watching warily, because a court ruling in Motown that reduces pensions and retiree health care could well provide a roadmap from debt for other troubled communities in the state.

Retiree advocates argue that cutting retirees’ benefits while paying other creditors would be unfair to those who spent years working for Michigan’s local governments with the understanding – some say guarantee – that they would be financially secure in their senior years.

“Raiding pensions to make bondholders whole isn’t the way to right Detroit’s fiscal house,” Jacqueline Morrison, president of AARP’s Michigan chapter said in a statement after Detroit filed for bankruptcy.

Gregory Gibbs, an attorney representing retirees in Flint and Pontiac, said retirees “from union positions had contracts that guaranteed them a specific level of care for the rest of their lives. The issue is whether the government because it’s broke can take away your property. Here they’re taking away thousands of dollars from these folks.”

Detroit Emergency Manager Kevyn Orr has said the city’s retirees will have to share in making sacrifices to help pull Detroit out of an $18.5 billion hole, including nearly $10 billion in underfunded pensions and retiree health care. In September, Orr proposed freezing current pensions and ending the practice of promising pension payouts to new municipal workers after Dec. 31. City workers would instead participate in a defined contribution plan similar to a 401(k).

Orr outlined those changes after a three-month investigation uncovered more evidence that the city’s pension funds had been mismanaged for years, including real estate investments that lost $144.8 million as of 2010, contributing to the city’s financial downfall.

But cutting pensions of retired municipal employees violates the state Constitution, Michigan Attorney General Bill Schuette warned in a document filed in U.S. Bankruptcy Court. Schuette vowed to defend a section of the constitution that asserts “the accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired…”

While allowing that Detroit has leeway to change the pensions of current employees, Schuette said the constitution offers “crystal clear protections for retirees living on fixed incomes. We all have a duty to uphold those protections, ensuring vulnerable pensioners do not fall victim to a financial crisis they did not create,” he said.

Federal Bankruptcy Judge Steven Rhodes appeared to reject that argument in late October, saying he could not offer pensions special protection because that would give “priority to one unsecured creditor over another.” Orr takes the position that federal bankruptcy law trumps the state Constitution, although legal experts say there never has been a Chapter 9 case in which federal bankruptcy law has been found to override a state constitution.

Schuette concedes the state constitution does not offer any assurance that retirees’ medical coverage is sacrosanct, and that the city has the authority to change health care coverage for retirees or, presumably, even eliminate it.

But Mark Hornbeck, communications director for AARP Michigan, argues that the lack of a constitutional guarantee “doesn’t lessen the moral obligation to protect the health care benefits” of retirees. Retirees, he said, are “not going to be able to go out and get jobs to help pay for their health-care benefits.”

While municipal retirees aren’t about to give up their medical coverage without a fight, it remains unclear whether they can prevail. Judges have issued conflicting rulings in lawsuits filed by the Pontiac and Flint retirees challenging decisions by city officials that reduced their medical coverage.

In early September, Oakland County Circuit Judge Phyllis McMillen refused to block Pontiac’s emergency manager from eliminating medical benefits for 1,200 municipal retirees. Health-care benefits are not constitutionally guaranteed, she ruled, adding that the state’s emergency manager law allows such contracts to be broken.

In two pending federal cases, trial court judges split on whether the cities of Flint and Pontiac could unilaterally cut retirees’ health benefits under the state constitution.

In March, U.S. District Judge Arthur Tarnow barred Flint’s emergency manager from cutting retirees’ health coverage, but the Sixth U.S. Circuit Court of Appeals delayed that order from taking effect while it considers the case on appeal.

In the case involving Pontiac retirees, federal Judge Lawrence Zatkoff declined to block the city from cutting the retiree’s medical coverage. That order was likewise set aside, though the appeals court did not directly address the merits of retiree health care cuts.

Those conflicting decisions leave the retirees’ health care in legal limbo.

Pat Shellenbarger is a freelance writer based in West Michigan. He previously was a reporter and editor at the Detroit News, the St. Petersburg Times and the Grand Rapids Press.

11 comments from Bridge readers.Add mine!

  1. David Waymire

    “The issue is whether the government because it’s broke can take away your property. ”

    Worth remembering that “the government,” i.e., state elected officials, chose to “break” themselves. We’ve cut taxes by billions of dollars in Michigan with the goal of creating more and better jobs. It’s obviously not worked. And we have just cut taxes by another $200 million with the elimination of sales tax on the difference, with no replacement. These are choices lawmakers and governors are making, dictated by their beliefs, not by economic realities. We are now some $6 billion below the Headlee revenue limit, indicating that the share of personal income going to taxes has declined significantly over the last decade.

  2. Rick

    Interesting….if our pensions are not to be meddled with or diminished as per state constitution, then how is it that Gov Snyder “diminished” our pensions by 4% each month ( a new tax ) to “share the pain and burden” in oder to help the State of Michigan remain financially sound ???? Seems to me that this is the first step towards eliminating our pensions.

    1. Harpo

      Rick did he diminish our pensions by 4% or did he diminsh our current income? Don’t think I am happy about the 4% I am not.

  3. Tough Love

    The pain Public Sector retirees will feel with retiree healthcare/pension reductions cannot fairly evaluated w/o considering the similar retiree healthcare and pensions received by the typical Private Sector Taxpayer who pays for those Public Sector benefits ……. and UNIVERSALLY, Private Sector pensions & healthcare benefits are ALWAYS very materially less than those promised Public Sector workers.

    Sorry, but it’s simply NOT fair or appropriate for those (the PRIVATE Sector taxpayers) who get so much LESS, to pay more in taxes so those (the Public Sector workers/retirees) who currently get so much MORE can continue to do so.

    1. Pete

      Hey tough love, why not check the wages those in the private sector get. Public employees have always worked for less with the social contract offering retirement income and health care. Going back on this now is an outrage, especially when taxes the rich pay are being slashed. You want your life to get better by attacking people in the same boat as you. How about looking at the dude driving the yacht for a change? Where does this blind devotion to the needs of the wealthy at the expense of the middle class come from? Let’s stop the hero worship of the rich this society is afflicted with and stop attacking each other too.

      1. Tough Love

        Pete, Your reply is so typical of Public Sector workers riding this gravy train.

        You started with the BS that Public Sector make less in cash pay. While that may have been true 25+ years ago, that gap closed years ago (per the US GOV’t BLS), and now Public Sector workers make MORE in cash pay in all but a very few of the highest professional occupations (e.g., doctors, lawyers, etc.)

        Then, the very typical diversion from the issue at hand … discussing your grossly excessive pensions & benefits, the taxpayer paid-for share of which is ALWAYS multiples greater in value at retirement than those of your Private Sector counterparts. Didn’t your mama ever tell you that 2 wrongs don’t make a right ? The greed of the rich in know way diminishes the extraordinary greed of the Public Sector Unions/workers.

        In many many towns and cities (and perhaps some states), the bankruptcy process (or simply “insolvency” and no money) will whittle your pensions & benefits down to a level no greater than those of the Taxpayers who you want to pay your bills…..a loss of 50-75% of the absurdly generous (but financially hollow) “promises” is certainly in your future.

        1. pal newman

          TL…spot on…public sector greed will kill the golden goose…they know it but don’t care…wonderful aren’t they!

    2. Married to a fire fighter

      Not true that public workers have larger pensions. Average is about $4000 per year. In addition, police and fire cannot get Social Security benefits. If they had other jobs, their SS payment is about $300 per month after medicare deduction. Can you live on that?

  4. Joe Smith

    The sad bad fact is that for years the state and its municipalities have not paid their legally required Annual Required Contribution (ARC) to their public pension funds. They were not absolutely required to promptly do this because a Federal law on this, ERISA..Earned Retirement Income Security Act that was passed in 1974, contained an exemption for public pensions. Republicans in governments nationwide perceive this as meaning that public retirement trust funds are one of the last large caches of money in the nation that are free to steal. They are now and have been for decades playing a real life game of the the fairy tail ‘Cat and Mouse in Partnership’. Cat and mouse found a pot of fat and decided to put it away for days of difficulty. The cat…as in fat cat…stole it all in small amounts over the months, sugar coating his reports to the mouse…’top off’….’some down’…’half gone’… When the mouse finally caught on and confronted the cat, saying his next report would be …’all gone!’ the cat got mad and ate the mouse…thereby dissolving the partnership. This scam is detailed at some length in a recent edition of Rolling Stone Magazine, October 2013, available at most newstands. Many, many states, municipalities are ROUNDLY guilty of this, especially CalPERS, retirement fund managers in California, and others in Texas and other southern states.

  5. William C. Plumpe

    As a recent City of Detroit retiree I agree that everyone needs to share the responsibility and take on some of the pain to help bring Detroit back to financial health. But I don’t think that any one group should get special treatment unless they warrant it—unless it truly helps the City’s finances.
    I think that Detroit retirees should get priority because if their pensions are diminished or imparied they are giving up a protection afforded them by the Sate Constittion. They should be compensated in some manner for giving up their right to that Constitutional protection. They should get priority over all other unsecured creditors in the bankruptcy process. That only seems fair and the rule of law always strives to be as fair and equitable as possible. And remember that retirees are already paying a health care surcharge along with increases in co-pays too. I don’t mind paying my fair share but don’t scapegoat me or give me a haircut below the chin just because I’m an easy target. Enough said

  6. ghostrider

    Just get rid of the government ? Solve all the problems !

Leave your comment...

Your email address will not be published.

Invest in non-partisan journalism.

Donate to The Center for Michigan.Find out why.