When a city goes bust, the one certainty is uncertainty.
Bankruptcy leaves citizens wondering how many essential services, such as police and fire departments, will be cut. City workers wonder whether they will keep their jobs.
And then there are those who have begun to enjoy retirement after years of service to their towns and cities. Living on fixed incomes, they are left to wonder whether their plans will be torn asunder by misfortune and perhaps the mistakes of others.
All those questions are in play in Detroit, the largest U.S. city so far to declare bankruptcy. The resolution is likely years away, and the courts and the state legislature will play important roles in any outcome.
Already, however, the city’s labor unions are fighting the notion of cuts in the pension checks and health benefits of Detroit’s 20,000 or so retirees.
Of Detroit’s $18 billion in long-term liabilities, $3.5 billion stem from city pensions, while another $6.4 billion are related to other benefits, mostly retiree health care, according to the city’s emergency manager.
While there is disagreement about those figures, pension experts say that whatever decisions Detroit makes could set a precedent for retiree benefits in other cash-strapped cities and counties nationwide.
To a degree, some precedent has already been set, in Central Falls, R.I.
Retired city workers in that city had their pensions slashed, some by more than half.
The saga began in August 2011, when the city of 18,000 declared bankruptcy. Myriad woes stemming from an industrial economy in decline helped cause the problem. When Central Fall declared bankruptcy, it had a debt of $21 million, an unfunded pension liability of $80 million and an annual budget of $16 million against $21 million in expenditures. Something had to give.
Under the Chapter 9 bankruptcy filing, the state-appointed overseer, Robert Flanders, slashed the pensions of Central Falls’ police and fire retirees by as much as 55%. Emotions ran high.
“The media was not very kind to us,” recalled Donald Cardin, president of the Central Falls Firefighters Association. “(It) portrayed as all having pensions of over $100,000. In reality, most pensions were about $35,000.”
According to Bruce Ogni, president of the Central Falls Police Retirees Association, just one of the 110 police and fire pensioners who had worked for the city was receiving as much as $50,000 annually.
Regardless, Ogni and Cardin say the cuts to pensions were rammed through with no time to study the matter or offer to negotiate. There was a single meeting during which the cuts were spelled out. It turned out to be a take-it-or-leave-it proposition.
“(Flanders) wouldn’t meet with us. He wouldn’t even look at us. He treated us as thieves,” Cardin said.
Both men see a deeper motive for the swift reduction in pension payments and medical benefits meted out to the Central Falls retirees.
“We were supposed to be the model for pension reform for the state,” Ogni said. “Ninety days before the bankruptcy was filed, the legislature passed a law putting bondholders ahead of everyone.” That meant other creditors, including retirees, had to wait in line.
Since the Central Falls bankruptcy, unions in two of Rhode Island’s larger cities, Providence and Cranston, have negotiated changes to their retirement benefits, each giving up all or part of their cost-of-living adjustments for a decade, something Ogni says would have been far less painful than the cuts his membership faced.
And as onerous as the decrease in monthly payments was to Central Falls retirees, the changes in medical coverage was even more a burden for many.
Before the bankruptcy, retirees paid nothing for their medical care. That changed post-bankruptcy, leaving many unable to afford the cost for what turned out to be less coverage. Because their labor contracts had allowed employees to retire well before Medicare would kick in, many were then left without medical coverage.
Others like Ogni have been able to get benefits through a spouse’s workplace. But that hasn’t come free, Ogni says. In addition, a low-cost life insurance policy that retirees had paid into for years was canceled.
When the retirement benefit cuts were put in place, Ogni and Cardin and other union leaders looked for ways to soften the blow.
With the public sentiment riding high against them, they sought help in the form of a bankruptcy lawyer. That put them on a path to the legislature – the same elected body that changed the law to put the pensioners behind bondholders in paying down the debts owed by the city.
What the retirees found, according to Cardin, is that many lawmakers had not fully considered the human cost that would be exacted by the pension cuts.
“A lot of legislators told us that if we had been told (about the impact of the cuts) we would never have signed off on bankruptcy,” he said. “That’s when we made the decision we had to play the political game.”
That game included face-to-face meetings with legislators to explain the plight of the retirees.
“We won over legislators who were dead set against” helping us, Cardin said.
Winning them over meant a great deal, at least a while to come. Lawmakers agreed to kick in enough money over a five-year span to bump the pensions back up to 75 percent of where they had been before the cuts.
Cardin, for one, was able to use the money to keep his home.
“If I had to tell the people of Detroit one thing,” Cardin said, “I’d say now is the time to get political and get a bankruptcy lawyer.”
So far, Detroit’s city worker unions haven’t done that.
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