Detroit retirees compromised for sake of city's future

DETROIT — A keen interest in the revitalization of Detroit played a significant role in the Detroit Retiree Committee's decision to support pension cuts proposed in the city's bankruptcy exit plan.

The committee initially took the position that pensions are constitutionally protected. But the city's commitment to improving Detroit contributed to the committee's decision to back down, according to testimony Wednesday from Ron Bloom, a member of the committee.

"Part of the test of whether Detroit's plan would be successful was whether Detroit could be able to revitalize itself," Bloom said. "Anything we put forward, we had to feel in good faith was consistent with Detroit being able to revitalize itself.

"The city was dysfunctional. We didn't like what they had to say often, but we felt their commitment to revitalization was sincere."

The committee is a court-appointed body that represented Detroit's retirees. Bloom, who also served as the "auto czar" on President Barack Obama's task force that designed the bailout of General Motors and Chrysler, analyzed Detroit's financial situation for the retiree committee.

Bloom's testimony was the focus of the morning's proceedings in Detroit's bankruptcy confirmation trial, which is in its 10th day.

Bloom explained the rationale behind the retiree committee's recommendation to support the city's restructuring plan, which calls for civilian pensioners to accept 4.5% cuts to their monthly checks, the elimination of annual cost-of-living-adjustment (COLA) increases and a claw back of excessive annuity payments. Under the plan, police and fire pensioners would take no cuts to their monthly checks but would receive a reduction in COLA from 2.25% to 1%.

The retiree committee agreed to endorse the plan ahead of a July vote by retirees. Retirees and workers voted in support of the plan.

Early on, the committee "had a pretty vigorous disagreement with how we thought the case should go," Bloom said, adding that the retirees were never treated like favored insiders among the city's creditors.

But as realities of the case set in, and it became clear pension cuts could be worse if retirees rejected the plan, the committee decided to back the plan.

"We believe that we received enough," Bloom testified.

Bloom also talked about the risk Detroit's retirees will face for health care coverage when the city emerges from bankruptcy.

Under the city's plan of adjustment, a VEBA, or a voluntary employee beneficiary association. Under a VEBA, an independent board of trustees manages money and oversees both the payment of health care benefits and the investment of remaining funds.

"The city is getting out of the health care business," Bloom said.

The city's bankruptcy plan calls for the city of Detroit to contribute $450 million through new bonds to fund the VEBA.

"If those notes trade well in the market place they will be worth more, if they trade poorly, then they will be worth less," Bloom said. "So all of the risk….is borne by the VEBA beneficiaries, by the people themselves. So there is a fundamental risk shift."

The creation of VEBAs has become common across the nation as corporations and municipalities wrestle with escalating health care costs.

In 2007, the UAW agreed to allow General Motors, Ford and Chrysler to fund VEBAs for retired autoworkers.

Detroit bankruptcy trial live blog

Detroit's bankruptcy confirmation hearings resumed Wednesday.

See all the details as they happen from this Twitter blog from Free Press reporter Joe Guillen.