Michigan governor offers pension aid to Detroit, with conditions

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Michigan governor offers pension aid to Detroit, with conditions

Michigan Gov. Rick Snyder wants the state to spend up to $350 million to help fund Detroit's pensions if unions agree to stop fighting the city's bankruptcy.

By Alana Semuels

7:27 PM PST, January 22, 2014 - Los Angeles Times

Michigan Gov. Rick Snyder is recommending that the state Legislature approve up to $350 million to help fund pensions in Detroit, though he repeatedly emphasized that the funds would come with some strings attached, including that labor unions would have to agree to drop their legal challenges to the city's bankruptcy.

"This is a settlement. This is not a bailout," Snyder said at a Wednesday news conference, where he appeared with the majority leader for the state Senate and the speaker of the state House, both Republicans.

The money would be merged with the $330 million recently pledged by a group of foundations to help make up for unfunded pension liabilities as well as keep artwork in the Detroit Institute of Arts.

Snyder said he had received positive feedback from the Legislature for the plan, which would use money from a tobacco settlement to help fund the pensions over 20 years.

There will be conditions, however, he said. The money would be put forward only if there was a settlement involving the city, state, unions and retirees, meaning unions would have to drop their lawsuits. Some of those lawsuits revolve around an amendment to the Michigan Constitution that protects public pensions, though it's unclear whether those legal challenges would hold up in court.

Snyder also suggested that the money go specifically to low-income pensioners, and that there be independent fiduciary management of the pension funds to ensure that they're being run effectively.

"The point of doing a settlement is to say, 'Let's put this behind us so that we don't have ongoing lawsuits,'" Snyder said. "Let's put that to bed so we can all focus on growing Detroit."

The immediate reaction from the unions was far from positive. Advocates for pension funds, who objected to the idea of bankruptcy in the first place, said they were unmoved and would continue to call on the governor to fund all of the city's pensions, as they say he is constitutionally obligated to do.

"Gov. Snyder deliberately put retirees in harm's way when he refused to protect pensions in the Detroit bankruptcy," said Jordan Marks, executive director of the National Public Pension Coalition, an alliance of public sector unions. "The amount proposed is far too little to avoid unconstitutional cuts in benefits for retirees who, on average, earn less than $30,000 per year."

Snyder, a Republican who was a businessman before entering politics, probably had to hold his nose to announce what will surely be termed a bailout by many. He said that no money from state taxes would be used for Detroit's pensions and that the tobacco money was now being spent on Medicaid and economic development programs. But he said the settlement was a way to resolve Detroit's bankruptcy more quickly and avoid being bogged down in lawsuits for years.

"How many of us have traveled somewhere in the country or the world and had to listen about this bankruptcy?" he said. "To see it happen for a much shorter time, versus a longer time, because there's a settlement, I view that as having tremendous value to the state of Michigan."

It's impossible to say just how unfunded the pensions are because actuaries must guess how much money the funds will need to pay out in the future. The city's emergency manager, Kevyn Orr, put the figure at $3.5 billion; some unions contend it could be as little as $650 million. The number is likely somewhere in between.

The offer of a settlement will also likely bring up a contentious issue of cash flow between the state and the city. Detroit says Michigan owes it $220 million because of a revenue-sharing deal agreed upon by a handshake years ago; under the deal, if Detroit lowered its income taxes, Michigan would turn over a certain amount of revenue each year. Michigan's contributions to Detroit's budget have dropped significantly over the last decade.

Snyder may have an uphill road in getting the Legislature to agree with his plan. But comments from the two Republican leaders who appeared with him Wednesday indicate that they also see an advantage to such a settlement.

"We need to protect taxpayers from the burden of the attorney general's argument that they should be held liable for $3.5 billion in Detroit pension debt," House Speaker Jase Bolger said. "This is the right thing to do."

It's not unprecedented for government to step in and help flailing cities; in 1975, the federal government gave $2.3 billion in seasonal financing to New York City to help it avoid bankruptcy. But it isn't seen much lately, said John Pottow, a University of Michigan bankruptcy law professor.

On the other hand, Michigan faces a unique situation because of the constitutional amendment protecting pensions, which could create legal headaches down the road.

"This is a different kettle of fish; we're the only ones with this constitutional thing hanging over our heads," Pottow said.