Here’s the one thing certain about Detroit’s bankruptcy: You don’t want to play poker with Kevyn Orr.
The state-appointed emergency manager had everyone convinced city workers and retirees were facing a steep 26% cut in their pensions – a cut that would jump to 34% if they didn’t quickly approve the smaller amount.
The city was getting ready to mail them all ballots explaining the cuts and asking for their approval.
Then, voilà – yesterday, everything changed. Suddenly, negotiators came up with a deal whereby most pensions would be cut by less than 5%. Police and fire retirees pensions won’t be cut at all.
There seems little doubt that the 32,000 employees and retirees will approve this deal. Yet we need to remember two things. First of all, this is not final yet – not by a long shot.
Something else that’s still very uncertain has to happen first. The Michigan Legislature has to approve contributing $350 million to a fund designed to shore up the pensions and protect any of the work in the city-owned collections in the Detroit Institute of Arts from being possibly sold for the benefit of the creditors.
That is not going to be easy.
Gov. Rick Snyder supports the idea, but the lawmakers are not bound to listen to him.
Republicans control both houses, and some of them don’t want to give Detroit a dime for anything, no matter what. Others may be afraid that a vote for Detroit would hurt them politically, especially if they are facing a Tea Party primary challenge.
Paradoxically, the deals reached yesterday may actually hurt the chances of the so-called “Grand Bargain” being approved in Lansing, because some of the lawmakers may think the pensioners are not sacrificing enough.
But there’s another side to this, too. What almost nobody seems to realize is that this pension deal is less good for the retirees than it sounds, and could easily get a lot worse.
All it would take is the reappearance of one dirty word: inflation.
We have gotten used to historically low inflation rates, and forgotten this hasn’t always been the case. We’ve had inflation rates of less than 2% during the last few years.
But inflation was running 5% just before the Crash of 2008. Back in the early 1980s, it was in double digits. The deal the city struck with the pensioners contains no cost-of-living adjustments for most pensioners, and a meager 1% for police and fire retirees.
Even 2% inflation means these pensions are going to lose value every year.
If inflation increases someday, as it well may, it won’t take too long for the value of these pensions to shrivel dramatically. That’s not to take anything away from this deal. Kevyn Orr and the pension negotiators deserve credit for shrewd bargaining and common sense.
Still, I can’t help wondering about something. Former State Sen. Jack Faxon, the author of the section in the Michigan Constitution protecting pensions, thinks negotiators should have appealed the bankruptcy judge’s ruling that pensions could be reduced.
They don’t seem to be doing that. I wonder if they may come to regret it.