Rhodes: Pension plans too costly for cities
Detroit — The bankruptcy judge who green-lighted reductions in pensions and health insurance for more than 32,000 Detroit retirees said Wednesday he's "deeply concerned" about the unfunded liabilities other cities are saddled with.
Retired U.S. Bankruptcy Judge Steven Rhodes said Detroit and other cities need to consider moving away from costly pension plans and transition employees on to 401(k)-style defined contribution retirement plans.
Rhodes cited publicized estimates that American municipalities have unfunded pension liabilities ranging between $1 trillion and $4 trillion.
"It flies largely under the radar and it doesn't get a lot of attention and it doesn't get a lot of management and I'm deeply concerned about that," Rhodes said. "Because that's money cities don't have that they have promised to their retirees and I think that solution across the country, and including in Detroit, has to be at some point defined contribution (plans)."
Rhodes made the comments Wednesday during the annual Crain's Detroit Business "Newsmakers of the Year" luncheon at MotorCity Casino that honored his work in Detroit's historic bankruptcy, as well as that of former Emergency Manager Kevyn Orr.
Detroit's bankruptcy restructuring plan cut pensions for non-uniform retirees by a minimum of 4.5 percent and reduced inflationary cost-of-living increases for retired police officers and firefighters. The reduced benefits will begin showing up in retirees' pension checks in March. But the plan keeps in place a hybrid pension plan that requires new employees to contribute more to their retirement.
Rhodes suggested Detroit missed a chance to get out of the pension business altogether during the bankruptcy, which officially ended in December after the judge approved Orr's restructuring plan in November.
Orr shared the stage with Rhodes and the bankruptcy's chief mediator, Chief U.S. District Court Judge Gerald Rosen and defended his decision not to pursue a 401K plan for city workers.
"Was it a missed opportunity? I don't think so," Orr said. "Our general services pensions are modest, $19,400 (per person) on average."
Police and firefighters get pensions that average about $25,000 a year, but they also are not eligible to collect Social Security like other retirees.
With Rhodes' permission, Detroit was able to reduce its $3.13 billion unfunded pension liability by 54 percent to $1.45 billion through reduced benefits and the 20-year "grand bargain" infusion of $816 million in contributions from state taxpayers, private foundations and Detroit Institute of Arts donors. The city used the bankruptcy process to slash its promised retiree health insurance benefits from $4.3 billion to $450 million.
Rosen, the architect of the "grand bargain," noted bankruptcy negotiations produced more conservative assumptions for investment returns from the city's two pension plans. The restructuring plan assumes 6.75 percent in investment returns, down from the previous assumption of 8 percent.
"We did make progress," Rosen said. "It's a bit inaccurate to say we didn't take advantage of it."
The three men, who were central figures in shepherding Detroit through an expeditious Chapter 9 bankruptcy, reflected on the case and its implications for the city, state and country during the Crain's event, which drew about 450 people, including city and creditor attorneys who were involved in the 17-month-long case.
Before the luncheon, Orr joked that he feels like a "parolee" after stepping out of the spotlight from his role guiding the city through the bankruptcy.
"The pressures that I was feeling in doing my job was nothing (compared) to the uncertainty of folks that depended upon their retirement income, health care," said Orr, who is now consulting for an emergency manager in Atlantic City, N.J.
Challenged by the impact of the bankruptcy on the lives of Detroit's 680,000 residents, Rhodes invited members of the public to air their views in court on Orr's debt-cutting plan.
"It was as much a political case as a legal case," Rhodes said. "... The residents of the city had a great stake in outcome of the case, a personal stake, each and every one of them. ... This is something that we in the bankruptcy court are totally unfamiliar with."
Rosen revealed that at the outset of the bankruptcy, he set a goal of forging to get Detroit out of bankruptcy by July 18, 2014 — one year after the city filed for Chapter 9 protection.
"I thought that would have a nice symmetry to it because of the one-year anniversary," Rosen said.
At Rhodes' urging, Detroit's bankruptcy reorganization spurred a deal between city and suburban leaders to regionalize the governance of Detroit's water and sewerage department — one component that remains unfinished.
"We have to find a way to build upon the momentum for regional cooperation ...," Rhodes said. "I think that is essential to the ultimate success of the city, and the region and the state."
Rhodes added that he's "very optimistic and enthusiastic about the city's future."
"All of the ingredients for success are there," Rhodes said. "The balance sheet has been fixed."