Retirees take brunt of cuts as judge approves Detroit bankruptcy

The “plan of adjustment” to end Detroit’s Chapter 9 bankruptcy means that city worker retirees shoulder virtually the entire burden of cuts, while the city’s neighborhoods continue to deteriorate with worsening poverty, water shutoffs continue unabated, and public workers lose their jobs to privatization.

Despite a valiant, ongoing mass struggle by a core grouping of retirees, city workers and community activists, which we will analyze in a future article, Judge Steven Rhodes approved the austerity plan on Nov. 7, which will allow the city to finally exit from what has been the largest municipal bankruptcy in United States history.

With the bankruptcy resolution, Detroit’s unsecured debt is reduced from $9.61 billion to $2.51 billion. Of that $7.1 billion reduction, $3.85 billion comes from eliminating retiree health benefits and $1.7 billion comes from cuts in pension payments. Thus, a total of $5.5 billion, or 78 percent,of the bankruptcy debt relief comes off the backs of the city’s retirees.

Instead of being enrolled in health insurance plans where the retirees paid 20 percent of the premium and the city paid the rest, most retirees are now receiving a $125 stipend toward purchasing their own plans on the federal health insurance marketplace. Uniformed retirees get a somewhat higher stipend.

Nonuniformed retirees also got a 4.5 percent reduction in their base benefits, elimination of cost of living amounting to an estimated additional 22 percent cut in benefits over time, and, for many retirees, a “clawback” of annuity payments they received from 2003 to 2013, amounting to as much as a further 15.5 percent benefit reduction.

Although accrued pension benefits are guaranteed under the Michigan constitution, Judge Rhodes refused to recognize this constitutional guarantee. Under the threat of even deeper cuts in their pensions, and after the unions and retiree organizations (including the American Federation of State, County and Municipal Employees, the Detroit Retired City Workers Association and the “Official” Retiree Committee) abandoned the constitutional challenge and urged acceptance of the cuts, the retirees, in a divided vote, accepted the cutbacks.

Banks and the rich get richer

The banks which caused Detroit’s financial crisis are not just let off the hook but actually receive millions in termination fees on interest rate swaps. Emergency manager Kevyn Orr’s former [sic] law firm, Jones Day, along with its consultants, leave town with a $140 million payment for their looting of Detroit. Billionaire Little Caesar’s pizza chain owner Mike Ilitch receives a $284.5 million public subsidy to build a new hockey arena, while Quicken Loan’s Dan Gilbert buys up huge swaths of downtown properties for a dime.

The financial institutions holding the remainder of the unsecured debt, primarily Syncora Insurance and Federal Guarantee Insurance Corporation, received large parcels of prime city land for investment in exchange for agreeing to reductions in debt service payments. An additional $6.4 billion in secured debt will be fully paid despite bankruptcy. (Detroit Free Press, Nov. 9)

Rather than recover the $300 million paid to United Bank of Switzerland and Bank of America on pension swaps, Orr and Jones Day, with the court’s approval, gave these banks an additional $85 million in swap termination fees — reduced by almost $200 million because of the intervention of the Moratorium NOW! Coalition and others.

While Orr and Jones Day initiated a campaign to shut off water on Detroiters who owed as little as $150 on their water bills, they refused to recoup $537 billion in swap termination payments on water bonds made by the city to UBS, Bank of America, Citibank, JPMorgan Chase and Deutsche Bank.

Rather than make the banks pay to remediate the blight they caused in Detroit’s neighborhoods, blight removal was awarded to Gilbert of Quicken Loans, a subprime mortgage originator, and is being funded in part by $100 million in federal “Helping Hardest Hit Homeowner” funds. These dollars were supposed to be used to help families stay in their homes, but instead are being earmarked to tear down homes.

Racist character of restructuring

The economic crisis in Detroit can be traced to the racist character of restructuring by the automobile industry, first by Chrysler in 1979-82 and then General Motors in 1986-88. This led to the shutdown of almost a dozen major auto plants in the city of Detroit, all with primarily African-American workforces.

The auto shutdowns reduced the total property value in Detroit from more than $30 billion in 1979 to less than $10 billion in 1990.

By the early 2000s, however, Detroit’s economy had stabilized somewhat, with home prices rising and neighborhoods coming back to life.

Detroit then suffered a second blow in the form of massive predatory lending by every major bank, part of the national subprime mortgage crisis which explicitly targeted people of color and women throughout the U.S.

From 2004 to 2006, 73 percent of the mortgage loans in the city of Detroit were subprime predatory loans, resulting in 67,000 mortgage foreclosures in the years 2005-07. Sixty-five percent of the foreclosed properties remained vacant.  From 2007 to 2010, tens of thousands more homes were foreclosed and became empty shells.

Not satisfied with destroying Detroit’s neighborhoods, the banks then placed the city itself in predatory loans in the form of interest rate swaps, or hedging derivatives, locking the city into paying the banks 6 percent interest on bonds while the actual interest rate was 1 percent or lower.

State cuts played role too

Also ignored in the bankruptcy proceedings was the role the Michigan state government played in creating Detroit’s financial crisis. From 2003 to 2013, the state government diverted to state coffers $6.2 billion in funds earmarked for revenue sharing with the cities. Detroit was deprived of $732 million in revenue-sharing funds during those years.

While Gov. Rick Snyder is praised in the corporate media for giving $195 million in funds from the state to the city as part of the “grand bargain” to save Detroit, in fact, if the state had just repaid the $732 million it stole from Detroit, there would have been no bankruptcy at all.

But as Orr and Judge Rhodes are praised for “saving” Detroit, the reality for Detroiters, 40 percent of whom live below the poverty line, is something else altogether. From January to October, 27,000 Detroiters had their water shut off. Judge Rhodes acknowledged the city has no plan to help poor Detroiters avoid shutoffs. But while he stated water shutoffs caused irreparable harm, he refused to place an injunction to stop the shutoffs, stating that the harm to “bondholders” is too great.

Conditions ripen for further struggle

In October, 24,000 homes in Detroit were put up for tax auction, with at least 7,000 of them still occupied.  The Wayne County Treasurer estimated that 62,010 tax foreclosure notices for 2015 have been sent out, with 37,000 of those homes still occupied.

Tens of thousands of city workers, many of whom are longtime residents, have seen their jobs eliminated and the services privatized to suburban contractors.

Even after bankruptcy, Detroit remains under the supervision of a financial review board, dominated by state appointees with no knowledge of or sensitivity to the reality for Detroit’s African-American community.

Long after Jones Day, Orr and Rhodes are gone, the struggle of Detroit’s workers and oppressed for their very survival will remain. Detroiters will have no choice but to return to the revolutionary traditions that made this city great.

Goldberg is a leader of the Moratorium NOW! Coalition and an anti-bank attorney who opposed the Detroit bankruptcy.