Detroit city retiree Rose Roots worries about the cost of prescription drugs, gasoline and house repairs. She never imagined anyone would cut her pension.
“It’s unbelievable that this day and time, in 2013, workers are threatened with being stripped of part of their pension and health benefits,” said Roots, a 76-year-old who worked three decades for the employment and training department. “Bankruptcy is one thing, but to start a remedy going after retirees?”
Shrinking benefits for 30,000 employees and retirees is part of Emergency Manager Kevyn Orr’s plan to avoid the largest U.S. municipal bankruptcy by erasing a $386 million deficit and reducing long-term debt of at least $17 billion. Orr proposes switching many retirees to federal health-care programs and eliminating pensions for employees with less than 10 years of service. His plan would also mean undetermined cuts to retirement checks.
The notion that pensions could be trimmed or wiped out is culture shock in the birthplace of the U.S. auto industry, where union strength dominates politics and negotiated benefits gave workers comfortable, middle-class lives over decades.
“That’s the way it’s always been,” said retiree Catherine Phillips, 55, who said she went to work for the city at 22 on her mother’s advice because of superior benefits. “I’m the first generation in my family who will not be comfortable. I’m going to be on edge.
‘‘Are they going to stiff me of my pension, of my health care?”
Roots said she learned about unions as a youngster. Her father worked at the Ford Motor Co. (F:US) plant in Dearborn, Michigan, in 1937 when United Auto Workers organizers were attacked by company security men. The so-called “Battle of the Overpass” led to the company’s unionization.
“I know what the unions mean to employees, or the lack of them,” she said.
On June 14, Orr proposed borrowing $2 billion, putting it toward $11.4 billion in unsecured debt and leaving creditors with losses on the rest. The debt includes unfunded pension liabilities Orr said may reach $3.5 billion.
Retirees would receive $100 to $250 a month to defray health-care costs. Detroit has about 20,100 retirees, about twice the number of active employees.
Orr, who was appointed by Republican Governor Rick Snyder, said that if he can’t strike a deal with creditors and employees, he’ll seek a Chapter 9 bankruptcy in federal court. Meanwhile, he’s ordered an investigation of all benefit programs, including pension systems.
The emergency manager believes Michigan’s constitutional protection of pension benefits wouldn’t stand in bankruptcy court, said his spokesman, Bill Nowling. Union leaders say their members may fare better before a judge.
Don’t bet on it, said Doug Bernstein, a bankruptcy lawyer with Plunkett Cooney PC in Bloomfield Hills, Michigan. The potential for a judge to rule Detroit pensions are unsecured debt -- thus vulnerable to deeper cuts --should be incentive for unions and retirees to settle with Orr, Bernstein said.
Roots said she shouldn’t be treated like bondholders who sought profits as the city sank.
“We are not speculators,” she said. “We put money into building our future.”
Pension officials have set aside $5 million to fight Orr in court.
Orr also plans to switch employees with less than 10 years of service to a 401(k)-style retirement savings plan, and freeze pension benefits for workers who are vested. Already, new hires for the police and fire departments are placed in so-called defined-contribution plans.
That follows a trend among private U.S. companies, where the percentage of workers with a pension fell to 8 percent from 22 percent between 1989 and 2010, according to the Center for Retirement Research at Boston College. The percentage of workers under 401(k)-style plans rose to 31 percent from 15 percent during the same period.
However, 78 percent of local-government employees were covered by pensions in 2011, according to the U.S. Bureau of Labor Statistics.
The average pension for Detroit’s retiring police and firefighters is about $30,000 a year, said Matt Gnatek, chairman of the police and fire pension board. Thanks to federal rules and local contracts meant to secure more money for younger retirees, they don’t get Social Security benefits and those hired before 1986 don’t qualify for Medicare.
“You better have done everything right in life to survive on $30,000 in retirement,” said Gnatek, 39, a homicide detective who works the overnight shift. “It’s very disheartening for me, in the last leg of my career, to know I won’t be able to retire after 25 years, or if I do it’s going to be such a big difference from what I anticipated.”
Former police Investigator John Day, 52, said he fears Orr will cut his $2,900-a-month pension and health benefits. With a six-year-old car and a post-retirement security job, “I’m not living large,” said Day.
He said retiring police officers are traumatized by mayhem they confront on Detroit’s streets. Older retirees with smaller pensions can’t pay more for health care, he said.
“When you start attacking pensions, it’s going to kill some people,” Day said. “I know one guy who’s 68. He has a $1,200-a-month pension and he’s looking for quarters in vending machines.”
Art Vardiman, 62, a retired bus driver, said he lives on a pension of less than $2,000 a month, plus Social Security and investments. Vardiman said he agrees with Orr that the city should have restructured long ago to adapt to a population that’s now one-third of its peak of 1.8 million in the 1950s.
Vardiman, whose wife died in 2007, views his retirement benefits as due recompense for 32 years of work.
“I played by the rules, did everything I was supposed to do, and then, boom,” he said.
To contact the reporter on this story: Chris Christoff in Lansing, MI email@example.com.
To contact the editor responsible for this story: Stephen Merelman at firstname.lastname@example.org.