What’s Next for Detroit’s Bankruptcy?

As we recently wrote about, Judge Steven Rhodes stunned the nation last week by making the unprecedented decision to approve the city of Detroit for a Chapter 9 bankruptcy.  While no one was exactly surprised that Detroit was in financial dire straits, the request of an entire city to take economic refuge in bankruptcy — and the controversial granting of that request — came as a shock to many.  And for a specific segment of Detroit’s population — those who rely on pension money as their financial life-line — that decision was not only shocking, it was devastating.  Now, both sides of the ongoing bankruptcy debate are grappling to see who comes out on top, and ultimately, what the shape of Detroit’s financial future will be.


Rhodes’ Bankruptcy Ruling Sets the Stage for Continuing Conflict

“THE DREAM IS NOW,” proclaims a haunting piece of graffiti decorating one of Detroit’s countless battered rooftops.  In the wake of U.S. Bankruptcy Judge Steven Rhodes’ ruling in favor of Chapter 9 for the city, that message is more timely than ever — but the dream is a divisive one.  On one side of the bankruptcy fence, Emergency Manager Kevyn Orr and his team of attorneys races against the clock to draft a realistic plan for bringing Detroit out of debt.  On the other, dismayed retirees who have just witnessed their already tenuous financial lifeline take a hit are gearing up to appeal Rhodes’ decision.

One thing is clear: while Detroit may have its bankruptcy, the matter is far from settled. As the dust of the initial ruling settles, the dust of Detroit’s next chapter is only beginning to billow.

Orr and creditors are facing off in private negotiations taking place behind closed doors, under the supervision of a court-ordered mediator.  Chief U.S. District Judge Gerald Rosen has been appointed to oversee discussions toward financial restructuring conducted between unions, retiree groups, and creditors. Rhodes, rather than opting to force a plan without broad consent, has instead placed a heavy emphasis on arriving at a mutually agreeable solution, stating, “The court strongly encourages the parties to begin to negotiate… with a view toward a consensual plan.”

But while Rhodes is bluntly advocating a spirit of accommodation and compromise, retirees and pensioners — who feel they have already been ignored by the ruling itself — are less than reassured.  AFSCME (the American Federation of State, County, and Municipal Employees) and its attorneys are fighting back.


Pensioners Devastated, Plan to Appeal

In Detroit, the average pension plan grants recipients about $20,000 in annual benefits — already a modest package.  In light of Rhodes’ ruling, that amount may be about to dip even lower.

The Michigan State Constitution protects pension plans, which led pensioners to hope they would be safe under the legislature.  “The state Constitution represents the people’s will,” the AFSCME said in a statement.  “That will cannot be ignored or subverted because it’s financially convenient to do so.”  Yet, that is what appears to have happened.

However, the AFSCME isn’t taking the decision lying down — instead, they plan to appeal.  AFSCME attorney Sharon Levine says, “We’re appealing all of the legal issues.  We do believe that Chapter 9 is unconstitutional. We do believe that pensions are constitutionally protected.”

While the pensioners of Detroit are at the epicenter of the legal battle, the case could set a dramatic precedent for pensioners in financially struggling cities across the country.  In Illinois, a vote was recently passed for cut the retiree COLA (Cost of Living Adjustment) rate in the interest of restoring the state’s financial health — even though Illinois, like Michigan, explicitly protects pension plans in its Constitution.  Illinois AFSCME spokesman Anders Lindall describes the situation as “a horror film.”

Orr, who is expected to create a restructuring plan by early 2014, says that where pension plans are concerned, he plans on implementing “humane” changes.

Bankruptcy law is complex and ever-changing.  If you are considering filing for bankruptcy, contact the law offices of Maselli Warren online, or call us at (800) 891-2657 today to schedule a consultation.