Retirees could bear brunt of Detroit bankruptcy

When Paula Kaczmarek moved to Detroit in 1978 to work for the city's public library system, a guarantee of good retirement benefits was a key sweetener that convinced her to leave her previous job in Boston.

"I basically came here for future security," said Kaczmarek, who retired in 2012, two years earlier than she planned, as the public library was facing potential layoffs.

Kaczmarek is among the more than 20,000 unionized retirees whose pensions and healthcare benefits hang in the balance after Detroit filed the largest municipal bankruptcy in US history.

In an interview, Kevyn Orr, Detroit's state-appointed emergency manager, said restructuring the city's crippling legacy costs is critical to Detroit's recovery.

"We can't pay benefits with money that's not there," he said. "It can't be done."

Retirees and labour officials acknowledged that the city's finances were in a shambles and they would have to share in the sacrifice to help Detroit recover.

But they said some of the significant benefits cuts reportedly proposed by Orr in talks with creditors would have a devastating impact on their lives.

"I do have some compassion for people who are investors in Detroit, naturally, because a lot of my pension income is based on investing," said 63-year-old retired city librarian Ellen Simmons.

"But it's hard to have a lot of sympathy when there are 20,000 real people who are not living high on the hog."

Although city retirement benefits are enshrined in Michigan's constitution, there is no clear road map for what will happen in a Chapter 9 bankruptcy, experts said.

The question is made more complicated by the fact that it is unclear who has the legal authority to negotiate on behalf of the retirees.

Orr and labor officials have locked horns over how to manage pension and retiree healthcare obligations. Orr was appointed by Michigan Governor Rick Snyder in March to try to resolve the city's financial crisis and tackle its $18.5 billion in long-term debt.

The city lists about $644 million in unfunded pension liabilities, but Orr has said the number is closer to $3.5 billion if 'more realistic assumptions' are taken into account.

Other unfunded post-employment liabilities, which include retiree healthcare costs, account for $5.7 billion of the city's outstanding debts.

The city of Detroit's two largest unsecured creditors are the city's general retirement fund and the police and fire departments' retirement fund.

In a court filing, Orr said the city intended to create a committee of retired employees to represent those workers.

"The appointment of a retiree committee is adequate representation for these individuals and to facilitate the city's restructuring of its pension and other post-employment benefit liabilities," Orr said in his filing.

Orr faced three separate lawsuits from current and retired workers trying to bar his attempts to file Chapter 9.

The conflict ratcheted up when Detroit filed for bankruptcy in federal court Thursday just minutes before labor lawyers could block those efforts in another state court located 90 miles (145 km) away.

At this point, it's unclear how much of a haircut, if any, the retirees will be forced to take. Still, they're preparing for the worst.

Simmons, who retired in January after working for the public library for more than 30 years, said she might have to go back to work or even move in with one of her children depending on how much is cut from her pension.

"My married kids, do they want mom living with them? They'll be gracious about it, but that's not what any of us want," she said.

Image: Broken windows are seen inside the abandoned and decaying manufacturing plant of Packard Motor Car in Detroit; Photograph: Eric Thayer/Reuters