Cries of Betrayal As Detroit Plans to Cut Pensions

AFSCME workers leaving City Hall after demonstrating inside. Hundreds participated in a rally, march and occupation. (Photo: Abayomi Azikiwe), a photo by Pan-African News Wire File Photos on Flickr.

July 21, 2013

Cries of Betrayal as Detroit Plans to Cut Pensions

By STEVEN YACCINO and MICHAEL COOPER
New York Times

DETROIT — Gloria Killebrew, 73, worked for the City of Detroit for 22 years and now spends her days caring for her husband, J. D., who has had three heart attacks and multiple kidney operations, the last of which left him needing dialysis three times a week at the Henry Ford Medical Center in Dearborn, Mich.

Now there is a new worry: Detroit wants to cut the pensions it pays retirees like Ms. Killebrew, who now receives about $1,900 a month.

“It’s been life on a roller coaster,” Ms. Killebrew said, explaining that even if she could find a new job at her age, there would be no one to take care of her husband. “You don’t sleep well. You think about whether you’re going to be able to make it. Right now, you don’t really know.”

Detroit’s pension shortfall accounts for about $3.5 billion of the $18 billion in debts that led the city to file for bankruptcy last week. How it handles this problem — of not enough money set aside to pay the pensions it has promised its workers — is being closely watched by other cities with fiscal troubles.

Kevyn D. Orr, the city’s emergency manager, has called for “significant cuts” to the pensions of current retirees. His plan is being fought vigorously by unions that point out that pensions are protected by Michigan’s Constitution, which calls them a contractual obligation that “shall not be diminished or impaired.”

Gov. Rick Snyder of Michigan, a Republican who appointed Mr. Orr, signed off on the bankruptcy strategy for the once-mighty city, which has seen its tax base and services erode sharply in recent years. But the governor said he worried about Detroit’s 21,000 municipal retirees.

“You’ve got to have great empathy for them,” Mr. Snyder said in an interview. “These are hard-working people that are in retirement now — they’re on fixed incomes, most of them — and you look at this and say, ‘This is a very difficult situation.’ ”

On Sunday, Mr. Snyder fended off the notion that the city needed a federal bailout. “It’s not about just putting more money in a situation,” the governor said on “Face the Nation” on CBS. “It’s about better services to citizens again. It’s about accountable government.”

Many retirees see the plan to cut their pensions as a betrayal, saying that they kept their end of a deal but that the city is now reneging. Retired city workers, police officers and 911 operators said in interviews that the promise of reliable retirement income had helped draw them to work for the City of Detroit in the first place, even if they sometimes had to accept smaller salaries or work nights or weekends.

“Does Detroit have a problem?” asked William Shine, 76, a retired police sergeant. “Absolutely. Did I create it? I don’t think so. They made me some promises, and I made them some promises. I kept my promises. They’re not going to keep theirs.”

Vera Proctor, 63, who retired in 2010 after 39 years as a 911 operator and supervisor, said she worried that at her age and with her poor health, it would be difficult to find a new job to make up for any reductions to her pension payments.

“Where’s the nearest street corner where I can sell bottles of water?” Ms. Proctor asked wryly. “That’s what it’s going to come down to. We’re not going to have anything.”

Officials overseeing Detroit’s finances have called for reducing — not eliminating — pension payments to retirees, but have not said how big those reductions might be. They emphasized that they were trying to spread the pain of bankruptcy evenly.

When the small city of Central Falls, R.I., declared bankruptcy in 2011, a state law gave bondholders preferential treatment — effectively protecting investors even as the city’s retirees saw their pension benefits slashed by up to 55 percent in some cases.

Detroit, by contrast, wants to spread the losses to investors as well as pensioners, and hopes to find cheaper ways to cover retirees through the subsidized health exchanges being created by President Obama’s health care law.

Bill Nowling, a spokesman for Mr. Orr, said the emergency manager’s restructuring plan would treat bondholders the same as retirees in bankruptcy.

“How can we tell pensioners or city workers that we’re going to have to adjust their payments on their pensions because of decisions that they didn’t make but that affect them, but that we’re going to pay more to people who made risky investments?” he said.

In recent years, public sector pensions have often emerged as a political point of contention, earning scorn from taxpayers who work in the private sector, where defined-benefit pensions providing a guaranteed stream of income in retirement have grown increasingly rare.

But the average pension benefit in Detroit is not especially high. The average annual payment is about $19,000, said Bruce Babiarz, a spokesman for the pension funds. And it is about $30,000 for retired police officers and firefighters, who do not get Social Security benefits, he said. Some retired workers get larger pensions, though: about 82 retirees who either worked many years or had high-salaried jobs are paid pensions of more than $90,000 a year, he said.

Among them is Isaiah McKinnon, who was the city’s police chief in the 1990s and whose pension is just over $92,000 a year. Dr. McKinnon said he and other officers earned their retirement money by serving in a dangerous profession. Dr. McKinnon was shot at eight times while on the job and was stabbed twice, and he has scars from the attacks on his neck and abdomen, he said.

Dr. McKinnon, who holds a doctoral degree in education administration, is an associate professor at Detroit Mercy University. He expressed concern about retired rank-and-file officers whose pensions were based on salaries far lower than his.

“We’re in this predicament, and everyone has to suffer to an extent,” Dr. McKinnon said. “But the predicament and the percentage — that has to be talked about.”

Many retirees expressed a feeling of powerlessness, a sense that they stand to lose the benefits they worked a lifetime for because of things beyond their control. Motor City has lost more than a million residents over the last six decades. When it shrank its work force, it left fewer current workers to contribute to pension funds that still had to pay benefits that were earned by large numbers of older retirees who had served Detroit when it was a bigger city.

Detroit, like many other cities and states, anticipates that its pension funds will earn about 8 percent in interest each year — a target that proved overly optimistic during the recent downturn, when it fell far short.

Laws allowing workers to collect pensions even when they retired at young ages proved expensive, as did adjusting benefits for inflation. And some of the accounting measures the funds used made them look healthier than they actually were. Mr. Orr recently announced that the funds, which had reported a shortfall of around $644 million, were in fact underfinanced by more like $3.5 billion, a figure that some dispute.

But other problems are unique to Detroit. Several pension officials were accused this spring of taking bribes and kickbacks to influence investment decisions, and Mr. Orr recently called for an inquiry into possible fraud, waste or abuse in the pension system.

For some retirees, pension reductions would compound the other difficulties of living in Detroit.

Michael Wells, 65, retired in 2011 after working at the Detroit Public Library for 34 years. He said he still owed close to $100,000 on his house in Detroit, which was appraised recently at $25,000. “I’m totally underwater here,” said Mr. Wells, who is one of the plaintiffs in a union-backed lawsuit to stop the city from filing for bankruptcy and from reducing pension payments.

He said he viewed the pension as part of the overall pay he was promised. “It’s deferred income,” he said. “Had I not had a pension, perhaps I would have gotten several dollars an hour more and that would be O.K. I would have taken that money and invested it in some kind of mutual fund or stock.”

Paula Kaczmarek, 64, said that she had planned to retire from the Detroit Public Library in 2014, but that she decided to retire early because she was having health problems and she feared younger co-workers could be laid off if there were more rounds of staff cuts. (The city, which had 12,302 workers three years ago, now has only 9,560.)

“It’s not anxiety, it’s fear,” Ms. Kaczmarek said of the proposed cuts.

And many simply cannot believe that Detroit, which was once the nation’s fourth-largest city, could go bankrupt.

Dr. McKinnon recalled that when he was a young man in the police academy, he once asked a sergeant what would happen if the city went bankrupt. “ ‘The city won’t,’ ” he said the sergeant had replied. “ ‘And besides, there’s billions of dollars in the retirement fund.’ ”

Steven Yaccino reported from Detroit, and Michael Cooper from New York. Erica Goode and Monica Davey contributed reporting from Detroit, and Mary Williams Walsh from New York.