‘LET ‘EM EAT CAKE’
JUDGE BACKS SNYDER, ORR IN BANKRUPTCY
By T. Kelly and Zenobia Jeffries
The Michigan Citizen
DETROIT — Gov. Rick Snyder’s determination to have Detroit under emergency management; Mayor Dave Bing’s years of deliberate inaction; a reduced tax base; and questionable financial deals with banks brought the city under Chapter 9 bankruptcy with Judge Steven Rhodes historic ruling Dec. 3 the city was eligible.
Rhodes, who had stayed all lawsuits challenging the constitutionality of Emergency Manager law PA 436, determined the city’s eligibility. The ruling makes Detroit the largest municipality in the country to meet the legal criteria.
In his 140-page opinion, Judge Rhodes stated PA436 is not unconstitutional as some have claimed. During the trial to determine eligibility he held no hearings on the issues raised by citizens in the lawsuits he put on hold.
Standing at the center of this moment are retirees, city workers and the banks.
Rhodes ruled retirees’ pensions are not protected by the state constitution. While he did request a plan of adjustment for pensions separate from other restructuring proposals, he was clear “pensions are not protected.”
Workers who deferred cash from their paychecks for years to save for retirement responded. A joint statement issued by the Boards of the General Retirement System of the City of Detroit and the Police and Fire Retirement System of the City of Detroit said, “The Pensions Clause of the Michigan Constitution absolutely bars any attempt by the City to cut or impair accrued pensions, no matter the reason.
“The State Constitution represents the people’s will. That will cannot be ignored or subverted because it’s financially convenient to do so, or because slashing pensions allows for a city to escape from its constitutionally protected pension benefit obligations.
“We submit that the Pensions Clause requires that the Court has two options. The first option is that it follows the earlier State Court ruling and finds the Emergency Manager Act — or Public Act 436 — unconstitutional, which means the City can’t be a debtor under Chapter 9 under these circumstances. The second option is that it determines that the law is limited by the Pensions Clause of the Michigan Constitution, which requires that as the City works through bankruptcy its pension obligations will be fully respected and upheld.”
Attorney Herb Sanders, who filed the lawsuit against the EM law on behalf of Stand Up for Democracy, said, “My understanding is that the proposal from (EM Orr) is a proposal in which individuals will get 10 cent on the dollar and those who are not will never receive a dime,” Sanders told the Michigan Citizen. “There are people who have invested in the pension system, who have relied upon that money being available when they do retire and the city at this juncture is not offering them anything.”
Before announcing his ruling, Rhodes called the city “service-delivery insolvent.” It is a theme Snyder used to justify the consent degree in March 2012, the appointment of Orr in March 2013 and repeated by Orr as he began immediately to push toward bankruptcy.
“The city does not have enough money to care for its residents or pay its debts,” Rhodes said.
Russ Bellant, chair of the Detroit Library Commission and retired city worker says the failure of city services is due in large part to Mayor Dave Bing’s policy of “Neglect By Design,” where Mayor Bing did not spend money allocated.
Bellant said failed street lights can be blamed on Bing who sat on DTE’s board for 20 years before becoming mayor. In 2011, Bing laid off all city workers who fix street lights. Failing street lights were mentioned repeatedly by Orr and Snyder as cause for bankruptcy.
Belle Isle’s neglect also is due to Bing’s refusal to spend money allocated for maintenance, Bellant said. Orr has already given control of the park to the state.
“This is a transfer of city assets to private monopolies,” Bellant said.
Many support Bellant. The Demos report issued a week before the ruling said what CPA Tom Barrow, and union officials have all said, the city was not in default, its pension fund was funded at a higher rate than the state’s at the time of filing bankruptcy although cash flow is an issue. That, they all note, is due to population loss, yes, but also excessive bank interest rates on pension swaps and other deals that do not benefit the city.
Banks have been the focus of Moratoriam Now for years as the Detroit grassroots group has fought the banks. Attorney Jerry Goldberg, a spokesman for the group, points to the destruction of the city’s tax base by over 72,000 bank foreclosures from 2008 to 2010. Moratorium Now has called on Orr and his former law firm Jones Day to negotiate with the banks and protect pensions.
However, as many continue to point out, Orr resigned from Jones Day only a week before he took over as EM to work with Jones Day as the attorney for the city in the bankruptcy case. Orr has paid Jones Day $22 million as of Oct. 30 and Jones Day has as clients, many of the banks who hold the city’s loans.
Orr will be back in Rhodes’ courtroom Dec. 17 arguing for a debt retructuring plan that puts Bank of America, a Jones Day’s client, and UBS, at the head of the creditors line. With $250 million Orr plans to borrow, he will pay off their interest rate swap. Goldberg says the swaps were a swindle, and Orr should be demanding an investigation.
Under Orr’s plan, 20 percent of city income tax dollars will be pledged for the first six years after bankruptcy to make good on plan, Goldberg said.
Mayor-elect Mike Duggan issued a statement following Rhodes’ ruling.
“This is a day in Detroit’s history that none of us wanted to see,” Duggan said in his statement, promising he’s going to do “everything I can to advocate on behalf of Detroit’s future in this process. We need to make sure the retirees are treated fairly on the pensions they earned and we need to make certain we come out of bankruptcy in a way we can afford to provide the quality of city services the people of Detroit deserve.”
Sanders said he will continue to move forward with the lawsuit. He expressed surprise that Judge Rhodes set a hearing date Dec. 16 for oral arguments to lift the stay placed on the legal challenges to emergency management.
“It’s rare a judge will reconsider a decision they’ve already made. It’s generally expected a motion for reconsideration is denied. We were surprised to know the judge may potentially reconsider his prior decision.”
Particularly, Sanders said, since Rhodes denied the motion to lift the stay on the NAACP’s challenge. Rev. Wendell Anthony, President, Detroit Branch NAACP, whose suit challenging the constitutionality of PA 436 was stayed by Rhodes in August, said he felt the rush to bankruptcy was unwarranted.
“Even Judge Rhodes agrees with us that the City did not negotiate in good faith,” Rev. Anthony wrote in a statement. “This is critical in understanding the consequences which have led to the erosion of the right to vote in the affected communities. The city of Detroit and other communities around the state should not be placed at a constitutional disadvantage which takes away their fundamental voting rights. We will continue our appeal of PA 436 and its negative impact on Detroit and other cities across the state of Michigan.”
The Detroit Branch NAACP filed an appeal last week to Judge Rhodes’ decision to not allow the lawsuit brought by the Detroit Branch NAACP and the Michigan State Conference NAACP to proceed in U.S. District Court. “The NAACP lawsuit challenges the constitutionality of Public Act 436 and argued that it violates the Voting Rights Act.
Sanders said, “we expect to go forward (with the law suit) and we expect to win, We believe in the constitutional issues we have raised. We believe we will receive justice. We hope that that will begin and take place in bankruptcy court. If denied we will appeal.”
If Rhodes allows the case to go forward to the U. S. District Court and the law is ruled unconstitutional, is a “very depressing thought,” Sanders said.
Sanders says his clients just want their day in court. “Whether PA 436 is ruled unconstitutional or constitutional… Let the chips fall where they may.”