Retirees sweat as courts weigh cuts to pension and health care

It’s a battle cry that began in Detroit and is spreading to other Michigan cities: “Don’t touch my pension.”

To that, many of the state’s retired municipal employees are adding another caveat: “And leave my medical insurance alone, too.”

With Detroit in bankruptcy court, employees and retirees of other Michigan local governments are watching warily, because a court ruling in Motown that reduces pensions and retiree health care could well provide a roadmap from debt for other troubled communities in the state.

Retiree advocates argue that cutting retirees’ benefits while paying other creditors would be unfair to those who spent years working for Michigan’s local governments with the understanding – some say guarantee – that they would be financially secure in their senior years.

“Raiding pensions to make bondholders whole isn’t the way to right Detroit’s fiscal house,” Jacqueline Morrison, president of AARP’s Michigan chapter said in a statement after Detroit filed for bankruptcy.

Gregory Gibbs, an attorney representing retirees in Flint and Pontiac, said retirees “from union positions had contracts that guaranteed them a specific level of care for the rest of their lives. The issue is whether the government because it’s broke can take away your property. Here they’re taking away thousands of dollars from these folks.”

Detroit Emergency Manager Kevyn Orr has said the city’s retirees will have to share in making sacrifices to help pull Detroit out of an $18.5 billion hole, including nearly $10 billion in underfunded pensions and retiree health care. In September, Orr proposed freezing current pensions and ending the practice of promising pension payouts to new municipal workers after Dec. 31. City workers would instead participate in a defined contribution plan similar to a 401(k).

Orr outlined those changes after a three-month investigation uncovered more evidence that the city’s pension funds had been mismanaged for years, including real estate investments that lost $144.8 million as of 2010, contributing to the city’s financial downfall.

But cutting pensions of retired municipal employees violates the state Constitution, Michigan Attorney General Bill Schuette warned in a document filed in U.S. Bankruptcy Court. Schuette vowed to defend a section of the constitution that asserts “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…”

While allowing that Detroit has leeway to change the pensions of current employees, Schuette said the constitution offers “crystal clear protections for retirees living on fixed incomes. We all have a duty to uphold those protections, ensuring vulnerable pensioners do not fall victim to a financial crisis they did not create,” he said.

Federal Bankruptcy Judge Steven Rhodes appeared to reject that argument in late October, saying he could not offer pensions special protection because that would give “priority to one unsecured creditor over another.” Orr takes the position that federal bankruptcy law trumps the state Constitution, although legal experts say there never has been a Chapter 9 case in which federal bankruptcy law has been found to override a state constitution.

Schuette concedes the state constitution does not offer any assurance that retirees’ medical coverage is sacrosanct, and that the city has the authority to change health care coverage for retirees or, presumably, even eliminate it.

But Mark Hornbeck, communications director for AARP Michigan, argues that the lack of a constitutional guarantee “doesn’t lessen the moral obligation to protect the health care benefits” of retirees. Retirees, he said, are “not going to be able to go out and get jobs to help pay for their health-care benefits.”

While municipal retirees aren’t about to give up their medical coverage without a fight, it remains unclear whether they can prevail. Judges have issued conflicting rulings in lawsuits filed by the Pontiac and Flint retirees challenging decisions by city officials that reduced their medical coverage.

In early September, Oakland County Circuit Judge Phyllis McMillen refused to block Pontiac’s emergency manager from eliminating medical benefits for 1,200 municipal retirees. Health-care benefits are not constitutionally guaranteed, she ruled, adding that the state’s emergency manager law allows such contracts to be broken.

In two pending federal cases, trial court judges split on whether the cities of Flint and Pontiac could unilaterally cut retirees’ health benefits under the state constitution.

In March, U.S. District Judge Arthur Tarnow barred Flint’s emergency manager from cutting retirees’ health coverage, but the Sixth U.S. Circuit Court of Appeals delayed that order from taking effect while it considers the case on appeal.

In the case involving Pontiac retirees, federal Judge Lawrence Zatkoff declined to block the city from cutting the retiree’s medical coverage. That order was likewise set aside, though the appeals court did not directly address the merits of retiree health care cuts.

Those conflicting decisions leave the retirees’ health care in legal limbo.