July 22, 2014

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Politics & Prejudices

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Detroit pension cuts contradict Michigan constitution

Well, the shoe finally dropped last week, and it was no surprise that Emergency Manager Kevyn Orr’s bankruptcy “plan of adjustment” includes cuts to Detroit pensions.

Big ones, especially for those who aren’t retirees from the police or fire departments. Public safety officers would take a 10 percent cut. Everybody else: 34 percent, a little more than a third.

The average pension is, they say, about $19,000 a year. If you are a water department retiree, say, that means you’d be cut to $12,540. A former cop’s compensation would fall to $17,100. 

To sweeten the pot, those cuts would be smaller (26 percent and 4 percent) if everybody meekly bows their heads, signs on the bottom line, and promises not to sue. Which, of course, is never going to happen; those receiving pensions and their supporters immediately vowed to fight.

But that’s not all. No matter what anybody does, even allowing pensioners to keep this much of the money they’ve counted on hinges, so far as I can tell, on the legislature contributing $350 million to a fund to ease pension cuts.

Gov. Rick Snyder is in favor of that. But many of the Republicans who control the legislature are far less friendly to Detroit. Some are demanding Detroit turn over control of the Water and Sewerage Department before they’ll consider aid.

Some have other conditions. Some may fear Tea Party retaliation in the primaries if they do anything to help Detroit, and some say, no way, no matter what. If they don’t approve the money for the fund, pensioners will take a much bigger hit …

And it is possible that creditors may yet go after the collection in the Detroit Institute of Arts, which would do more damage to the area’s future than we can easily imagine.

None of this is simple, and most or all of it hinges on whatever U.S. Bankruptcy Judge Steven Rhodes decides.

To be fair, as the bankruptcy process has played out, Rhodes has been a pleasant surprise in some ways. In December, he rejected a sweetheart deal that Orr negotiated with two of the city’s biggest creditors (Bank of America and UBS), saying he was giving too much away to the banks.

The judge has also hinted that he won’t look favorably on any settlement that takes too much from the pensioners.

But Rhodes did say that pensions could be cut — something that sent shock waves through those who thought that was forbidden by the Michigan constitution.

“Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy,” Rhodes ruled Dec. 3.

That would appear to directly contradict the Michigan constitution voters enacted in 1963. It says, “The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired.”

That seems as clear as could be: Thou shalt not cut people’s pensions. Unfortunately, America follows another clear-cut legal principle: Federal law always trumps state law.

When Judge Rhodes ruled that pensions could be cut, what he was really saying is that federal bankruptcy law allows him to do this — and this is superior to the state constitution.

And some have said the Michigan constitution isn’t that clear. They note that it goes on to say: “Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities.”

Some argue that meant every pension fund has to be fully funded, right from the start. 

But that’s something easily settled.

Neither Orr nor Rhodes may have known this, but the man who wrote those very words is alive, well and is following and resents a lot of what is going on. Former state Sen. Jack Faxon is best remembered as a longtime champion of the arts.

But before he began a 30-year-career in the Michigan legislature, he was a young teacher in the Detroit Public Schools. Then, in 1961, he got elected a delegate to the Constitutional Convention — at 25, the youngest one.

Soon after, the head of the Detroit teachers’ retirement system came to Faxon and said he thought the constitution should protect all public service pensions. 

That made sense to Faxon, but he knew he wasn’t a lawyer. So he drafted something, and took it to a political science professor at Wayne State University.

Next, Faxon took it to two senior attorneys, one of whom later became a federal judge. They all agreed it was fine, and airtight. Faxon then took it to his committee. 

He was a Democrat; two-thirds of the delegates to the Con-Con were Republican. But there was no disagreement.

“We argued over a lot of issues, but that wasn’t controversial at all,” said Faxon, who at 77 still works full-time as the headmaster of the International School in Farmington Hills, a private academy he founded back in 1968.

“Getting people to agree that pensions should be protected was like getting them to agree than Sunday is Sunday,” he told me, laughing.  But might those who wrote the constitution have thought it might be permissible to short people on their pensions if the entity that promised them was bankrupt, like Detroit? “Absolutely not!” Faxon said.

Morally and historically, he is totally right. That doesn’t mean those overseeing Michigan’s pension funds were always wise or even honest. They weren’t. That doesn’t mean that the city should have agreed to be as irresponsibly generous as it did.

When a clerk can work three decades at a menial Detroit job, retire and leave the city at 52, and collect a pension, something needs to be changed. 

But that was part of the contract when that clerk took office, and government is obligated to abide by that. This wouldn’t have happened in Ohio, because the state guarantees all government pensions there. That should be the case here.

After all, Detroit is a “political subdivision” of the state of Michigan, and I think the state has an obligation to any public pension holder; and when all else fails, make them whole.

That’s what should happen, but don’t hold your breath.

Do expect to see a whole lot of shakin’ going on, however, before this bankruptcy is through.   

THINKING ABOUT THE DIA

Maybe it’s time for a local version of the new movie Monuments Men, in which a special team of soldiers in the last days of World War II tries to find and save art treasures looted by the Nazis.

Our version could show a desperate band of enlightened citizens and half-committed politicians trying to save one of the nation’s great art museums from being looted and destroyed by greedy creditors hungry for every last dime they can get. 

The best title I can think of is Morning in America, which pays tribute to the Reagan-era contempt for cities that helped bring on all this. Or maybe Bankruptcy Men. But as a penniless producer, I am cheerfully open to suggestions.

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