Detroit Emergency Manager: Police, Fire Unions May Regret Claiming Pensions Are 96% Funded

Emergency Manager Kevyn Orr is warning Detroit’s police and firefighters unions that he may seek to diminish their standing as a creditor in the city’s bankruptcy if they continue to publicly claim their pension is 96 percent funded.

The emergency manager and city’s pension funds have been at odds over how underfunded the retirement accounts are, a dispute based on the life expectancy of retirees and assumed investment returns that legal experts expect will be litigated in bankruptcy court.

Orr’s actuarial consultants concluded Detroit’s Police and Fire Retirement System is $1.4 billion short of meeting long-term payouts for retirees — or 78 percent funded. But the police and fire pension fund’s consultant determined the retirement account is 96.1 percent funded with $147.2 million unfunded liability.

“It really doesn’t matter if its 120 percent funded or 50 percent funded, the city made a commitment to pay into the pension funds and has not done so,” said Bruce Babiarz, spokesman for Detroit’s Police and Fire Retirement System.

But in an attempt to beat back outcry from unions about potential pension cuts, Orr suggested this week he may use the police and fire pension fund’s numbers against retirees in bankruptcy court.

“Be very careful. You might have to live with that number,” Orr said Thursday on the “Craig Fahle Show” on WDET-FM (101.9). “And that means that’s less of an obligation that we have to meet in this process.”

Orr spokesman Bill Nowling said the city could at some point in the bankruptcy proceedings accept the police and fire unions’ figure and diminish their voting power on the city’s restructuring plan for unsecured creditors.

“We might take them up on their offer … and then they won’t get anything,” Nowling told The Detroit News.

Such a strategy would get the city off the hook for shoring up the pension fund after it exits bankruptcy, said John Pottow, a bankruptcy law professor at the University of Michigan.

“You don’t get to have a do-over,” Pottow said. “The whole point of Chapter 9 is to settle up your old debts and move on.”

Orr’s consultants also say the city owes the General Retirement System about $2 billion, or 65 percent funded, bringing total pension liabilities to an estimated $3.5 billion. The city has said it will settle its $11.5 billion in unsecured debt for $2 billion.

James Spiotto, a bankruptcy attorney with the Chicago law firm Chapman and Cutler, said the pension funds and their respective labor unions are taking an “unusual” tactic in arguing their claim on the city’s debt is less than what the city says it owes them.

“The emergency manager’s correct … criticizing the city could lead to the lower amount being used,” Spiotto said. “If you’re getting 10 cents on the dollar, you’d rather get 10 cents on $3.5 billion than 10 cents on $1 billion.”

Nowling predicted the police and firefighters’ pension board will eventually accept the city’s pension funding data.

“No attorney will let them come in and say it’s 96 percent (funded),” he said. “That’s just foolishness. Everyone knows that.”

Babiarz declined comment on the pension fund’s litigation strategy going forward as Orr’s legal team begins to make its case to U.S. Bankruptcy Court Judge Steven Rhodes that the city can’t pay its pension obligations.

“All I can say is that Mr. Orr has already acknowledged the pension funds are the largest creditors to the city of Detroit,” Babiarz said.

While the city and pension funds’ attorneys prepare to battle in future bankruptcy proceedings, city workers like firefighter Dennis Hunter are holding out hope they’ll be treated differently than secured creditors, such as banks, whose debt is backed by specific city taxes and utility revenues.

“I hope (Orr) realizes creditors and public safety workers should be two different things,” said Hunter, a 14-year veteran of Detroit Fire Department.

From The Detroit News