A Best-Case Scenario for Detroit's Public Pensioners

A recent development in Detroit's bankruptcy case may be the first step the process needs to give its pensioners the smallest haircut possible on their pensions.

Not that it would be a great deal.  The best-case scenario is a pension cut of 26 percent for most retirees and four percent of police and fire pensions.  Cost-of-living increases would be eliminated. This is part of the reorganization plan plan proposed by Detroit Emergency Manager Kevin Orr, who seems to have done his best to shield retired workers more than other claimants and to get the city on a sustainable track for the future.

The break came several days ago, when UBS and Merrill Lynch agreed to accept 30 cents on the dollar for their claim of $288 million, 20 percent of the city's total debt.

(It's hard to feel sympathy for the two banks.  In 2009 they worked out a complicated theoretical reduction of the city's pension costs that fell apart when city's credit rating fell and terms had to be renegotiated.  This could have been anticipated by anyone who took even a passing glance at the city's financial position at the time.)

Under bankruptcy reorganization law, a judge can force a "cramdown" of the debtor's terms if at least one impaired party agrees to its share of the deal.  The debtor is the city of Detroit.  An impaired party is one that does not receive 100 percent of its claims.

In the circumstances, the unions representing Detroit's retired workforce (also impaired creditors) could make a bold move and join the two banks, accepting the terms of the proposed deal.

Employees' buy-in would give the judge political cover to force the cramdown of Orr's proposed reorganization plan.

This in turn would pressure the Michigan legislature to pony up the $350 million Orr wants to complete his reorganization.  Other parties, including the Detroit Institute for the Arts, are also being asked to come up with money.

Their support is crucial.  Without it, Orr estimates public union pensions, which now average a scant $17,000 a year, would be cut by 34 percent. Police and fire benefits would be cut by 10 percent.  Because FICA contributions were not collected on paychecks during their working years, the public employees do not receive Social Security benefits.