By Susan Tompor
Detroit Free Press
WWR Article Summary (tl;dr) Back in July 2013, Detroit became the largest U.S. city to ever file for federal bankruptcy protection. Detroit emerged from its landmark bankruptcy in December 2014. However, the effects continue to be felt by many retirees who have had to adjust their life plans.
DETROIT
Five years after Detroit’s bankruptcy filing, retiree Barbara Yokom feels the financial hit each time she pays about $940 a month for health coverage.
It’s a bill that Yokom, 64, receives now only because the city ran into deep financial troubles and filed for Chapter 9 bankruptcy relief July 18, 2013.
Her health-care insurance was covered when she retired in April 2012 after 38 years of working as a library technical assistant at the main branch of the Detroit Public Library.
Retirees who are too young for Medicare, which covers those 65 and older, had to find health insurance elsewhere, and many paid a fairly steep price as they sought coverage under the Affordable Care Act, known as Obamacare.
Health care wasn’t the only hit, of course. Yokom saw a cut to her pension. She also was part of a group that had to hand over extra money that was part of a savings plan. She ended up turning over nearly $45,000 in what was known as a “clawback.”
Rose Roots, 81, still hears other city retirees express frustration about what the city’s bankruptcy cost them, especially when it comes to the higher health-care costs.
It is the human cost that is often too easily forgotten as many officials celebrate Detroit’s post-bankruptcy revival.
Without the everyday, real sacrifices of the retirees, the city would be going nowhere.
“It’s never good to have lost money. I don’t care who you are,” said Roots, who lives in Detroit.
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Roots moved to a smaller home on the city’s west side about three years ago in order to downsize.
Like other retirees covered by the general system, the bankruptcy agreement cut her pension by 4.5 percent, eliminated future cost-of-living adjustments and led to higher health-care expenses.
As someone who is covered by Medicare, though, she isn’t facing the huge out-of-pocket cost for health-care coverage that Yokom has faced for the past few years.
She is controlling her expenses in other ways, such as taking one vacation a year, when in the past she might have taken two or three trips. Last year, she went to California to visit relatives.
“It was a matter of scaling down,” she said.
She feels fortunate, as she knows some retirees are struggling as they try to raise grandchildren or deal with troubling health issues.
The bankruptcy cut money out of tight budgets that some retirees couldn’t afford to lose.
“You know and expect the cost of living is going to go up. But you don’t expect the money you’re receiving to go down,” Roots said.
Solution for bleak times
Detroit’s $18 billion bankruptcy rocked all sorts of expectations.
Back in July 2013, Detroit became the largest U.S. city to ever file for federal bankruptcy protection. Detroit emerged from its landmark bankruptcy in December 2014.
The city faced bleak times in which streetlights weren’t working, services were declining or nonexistent and Detroit was staring at the day when it would be paying 70 percent of its budget to retirees and bondholders.
Detroit ultimately shed $7 billion in debt and was able to restructure another $3 billion and put about $1.7 billion into improvements.
In the end, the bankruptcy proceedings eliminated $7.8 billion in payments to retired workers and the city got off the hook for $4.3 billion in unfunded health-care obligations and future costs.
It could have been far worse. At one point during the bankruptcy journey, the city’s general retirees were threatened with the possibility of seeing their pension checks slashed by up to 34 percent and police and fire retirees were looking at cuts of up to 10 percent.
Police and firefighter pensioners did not see upfront cuts to their pension checks. But they saw their 2.25 percent annual cost-of-living adjustments reduced to about 1 percent.
Police and fire also saw cuts relating to health care, and many are struggling with higher premiums under the Affordable Care Act, too.
“From a retiree’s perspective, I understand that many of them, if not all of them, will never believe that they are better off today than they would have been without the bankruptcy,” said Doug Bernstein, a bankruptcy attorney at Plunkett Cooney in Bloomfield Hills.
“Trust me, this could have been a lot worse.”
Bernstein is now counsel for the Foundation for Detroit’s Future, a nonprofit affiliate of the Community Foundation for Southeast Michigan, which was set up to implement the funding of the “Grand Bargain” approved as part of Detroit’s plan of adjustment.
A key to part to the city’s quick exit from bankruptcy, and a solution that helped pave the way for more livable pension cuts, involved more than $800 million that was promised over 20 years from foundations and private donors to shore up city pension funds and protect a sell-off of the Detroit Institute of Art’s collection during Detroit’s Chapter 9 proceedings.
Detroit’s two pension funds received the state’s grand bargain bankruptcy contribution of $194.8 million in early 2015.
Under the bankruptcy agreement, the city froze two existing pension plans, created two new plans for current and future workers, and established new governance structures to oversee the pensions.
While the pension cuts and higher health-care costs for most are painful, many retirees remain hopeful that the city’s continued rebound will lead to more stability for the city and the pension plans.
Retirees’ sacrifices
The retirees’ commitment and dedication to the city was key. It was essential to get the approval of the city’s retirees as part of the process for Detroit to emerge from bankruptcy. If retirees had not voted to approve the plan of adjustment in July 2014, the grand bargain money would have gone away.
“Sacrifices were made by people who had given to the city,” Bernstein said.
But Bernstein and others argue that retirees would have been far worse off if the city continued on its path toward financial collapse.
“You can’t get through it without somebody compromising what’s owed to them,” Bernstein said.
“The successful bankruptcy is one where nobody walks away happy.”
What the Detroit bankruptcy made clear is that in Chapter 9 bankruptcies, retirees could have an edge over Wall Street.
It was a shocking development for New York’s bond industry, as City of Detroit pensions overall ended up with a better recovery rate than general obligation bondholders, much to the frustration of Wall Street.
“Most of the pain fell to municipal bondholders,” said Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College.
Unlike mutual funds or other financial institutions that hold municipal bonds, of course, most of the city’s retirees didn’t have a way to recoup their losses.
The creative approach in Detroit meant the retirement commitments weren’t honored but, at the same time, they weren’t treated exactly the same as other creditors.
Aubry noted that the health of Detroit’s pensions going forward depends heavily on the city’s rebound.
The Detroit General Retirement System as of 2016 had $1.97 billion in assets with 19,874 participants.
The Detroit Police and Fire Retirement System had $2.9 billion in assets with 12,034 participants as of 2016, according to research by the Center for Retirement Research at Boston College and the Center for State and Local Government Excellence.
The Detroit Police and Fire Retirement System funding level was 73.7 percent as of June 30, 2017, when the fund had $3.2 billion in assets, according to the pension fund spokesman Bruce Babiarz. He said the fund had a rate of return of 11.3 percent.
Detroit’s General Retirement System funding level of the legacy plan improved from 63.8 percent to 65.6 percent as of June 30, 2017, based on an actuarial valuation as a result of investment performance, according to Michael VanOverbeke, general counsel for the system.
VanOverbeke said the investment environment has been rough in the first half of this year but he noted that the stock market had been stronger earlier.
Strong returns in the stock market in 2016 and 2017 have helped many investments in pension funds in general.
“What remains to be seen is how plans weather the next downturn,” Aubry said.
In general, Aubry noted that public plans remain about 70 percent funded on average.
Reduced city contributions
As part of the deal, the city temporarily reduced its pension contributions until 2024 to give the city some budget relief. The city would have to increase its contributions significantly in 2024. But the city has begun to prepare for hefty payments that would be required in six years.
In May, Moody’s Investor Service announced an upgrade in the city’s credit rating and outlook, reflecting an improvement in the city’s finances and the city’s move to implement a funding strategy for its looming pension obligations.
Detroit appears to be on track now to pay its pensions, if plan investment returns meet current assumptions, according to an analysis by the Pew Charitable Trusts released in March.
But it’s possible that unexpected costs, lower-than-anticipated investment returns and the city’s budget challenges could cause problems down the road, the Pew report noted.
Based on recent numbers, Pew noted that the estimated unfunded liability by 2024 would grow by $1.3 billion to about $2.7 billion.
Challenges and hurdles, of course, remain ahead.
Greg Mennis, who directs Pew’s work on public sector retirement systems, said the Detroit bankruptcy was essentially one of a kind, given the magnitude of debt, the size of the city and how the bankruptcy ultimately ended up working out.
Mennis said a very critical transition period exists between now and 2024 when the city must start funding the general and police and fire pensions again.
The city took an important step last year, though, when it began setting aside money to deal with required contributions to the pension systems in the future, he said.
One challenge: More money will be going out to pay benefits than will be coming into the system for several years.
So the system needs more available cash to pay benefits, impacting how investments are made.
“Detroit will need to closely track its available funds,” the Pew report noted.
Everyone’s financial squeeze was a little bit different under the bankruptcy even for retirees.
Yokom, who once saved about 3 percent of her pay into the city’s Annuity Savings Fund, ended up turning over nearly $45,000 to the city in a lump sum as part of a clawback that targeted those who participated in the annuity program.
The plan of adjustment included a way to reclaim money through a lump sum or a further reduced monthly pension check for about 6,000 City of Detroit retirees.
The city’s bankruptcy attorneys said the fund paid about $190 million in excessive interest from 2003 to 2013, including a minimum of 7.9 percent a year.
‘Irresponsible’
Critics noted that Detroit’s General Retirement System had some odd practices, including the fact that the Annuity Savings Fund offered a ridiculously high rate of return even during the stock market meltdown in 2008-09.
“It was irresponsible,” Aubry said. “They were basically offering employees a guaranteed 8 percent and not funding for it. They were giving employees all the upside.”
Yokom, who is single, says she preferred to give up her money via a lump sum, instead of seeing an even smaller pension check each month. She doesn’t understand why the pension board didn’t take better care when it came to the payouts in the first place.
“I wish they’d give us some of the money back that they took from us,” she said in an interview at her small home in Redford Charter Township.
It’s unlikely to happen any time soon. The plan of adjustment does allow for some restoration of benefits at some point, depending on performance. But based on the current funded level of the system, no such change is anticipated before 2024 at this point, VanOverbeke said.
Yokom, who has two cats, Smoky and Shadow, said she pays more for health-care coverage than she might with other plans because she wanted to stay with her same doctors.
She hopes that her cost can drop to around $65 a month for premiums for supplemental Medicare coverage once she turns 65 later this year.
She’s been able to get along on her pension of around $22,000 a year after taxes and premiums for vision and dental coverage. She started collecting Social Security at age 63 and has tapped into some investment income from her Individual Retirement Accounts each month.
While the numbers on paper look good, she said, she’s juggling various medical bills that can be $300 to $1,000 a pop. She’s also paying off a home equity loan for remodeling her kitchen.
So she works part-time, too. She makes about $11 an hour at a part-time job to bring in roughly another $9,000 or $10,000 a year.
“I’ve worked harder in the last five years than 38 years at the library,” she said.
Yokom plans to keep working as long as she can, lifting heavy boxes of books and stocking shelves with children’s books, the latest bestsellers and other books at various stores including Michaels Stores and Meijer.
“I’ve never lived an extravagant lifestyle,” she said.
