Recent court decisions in Michigan are making the issue of public employee benefits restructuring even more murky for states and local governments, and potentially adding more reasons for the Supreme Court to weigh in.
While Detroit's emergency manager has been given a go-ahead by a bankruptcy judge to continue a Chapter 9 bankruptcy plan that includes employee pension and healthcare benefit reductions, a federal appeals court has stopped a similar plan in Flint, Mich., just as other cities and states across the country face public debt and mull their options.
California cities in bankruptcy are trying to balance the books without large changes in employee benefits, while Illinois lawmakers have faced stiff union resistance to proposals for reduced cost-of-living adjustments and increased health plan cost sharing as a way to address the state's $100 billion unfunded pension liability.
In Michigan, where cities like Detroit, Flint and Saginaw have faced public debt problems, the state passed an emergency financial management law in 2011; it was then repealed by a statewide referendum in 2012, and replaced by another law in 2013 giving distressed local governments the option of choosing an emergency manager, filing Chapter 9 bankruptcy, entering mediation or signing a consent agreement.
In the cities and municipalities that have used emergency managers, some of them have sought changes to health and pension benefits that are now getting divided interpretations from the courts.
U.S. bankruptcy judge Steve Rhodes ruled in late December that Detroit could proceed with its plans to restructure bank debt and pension and health benefits, as a way out of insolvency and some $18.5 billion in debt.
Along with other reductions included in the Chapter 9 bankruptcy plan, Detroit emergency manager Kevin Orr recently issued an order freezing pension benefits for non-uniform employees and transition them to defined contribution retirement plans.
But that plan, approved in federal bankruptcy court, is headed for a challenge by unions representing Detroit city workers and retirees, in the U.S. Court of Appeals for the Sixth Circuit in Cincinnati.
And at that court, a judge recently came to a different conclusion in a separate but similar case, agreeing with a lower court that Flint should be stopped from implementing a benefits reorganization designed to save $8.5 million.
After Flint racked up a $25 million debt by 2011, for a population of 100,500, the city's emergency financial managers proposed balancing the budget in part through ending 115 positions in the city government, reducing salaries by 20 percent, and modifying pension and health plans, with increased deductibles of up to $2,000, copayments, and coinsurance.
The appeals court agreed that the modifications are likely violations of collective bargaining contracts and constitutional contract law. Like other states, Michigan added a provision to its state constitution in 1963 stating that employee benefits "shall not be diminished or impaired," and some analysts argue that some states may need to amend their constitutions to legally modify public benefits.
Appeals court judges Martha Craig Daughtrey, R. Guy Cole, Jr. and Helene N. White also agreed with the district court that altering public benefits "was not reasonably necessary to avoid bankruptcy."
In the 2013 fiscal year, with the pension reorg plan stalled, Flint was able to produce a $4.2 million surplus, through a range of other strategies: higher water and sewage rates, higher garbage collection fees and a new street-light assessment.