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Retirees in limbo with Detroit bankruptcy decision

DETROIT — Shirley Lightsey’s phone keeps ringing. As head of a group of Detroit retirees, she’s trying to keep up with calls from anxious pensioners who fear their monthly payments are at great risk now that a judge says the bankrupt city can cut them.

Unions and pension funds are pledging to appeal a historic decision by Judge Steven Rhodes that found Detroit is broke and public pensions in a bankruptcy aren’t protected by the Michigan Constitution. Although union leaders have appealed, bankruptcy experts say it’s now a critical time to negotiate the best deal possible for 23,000 retirees and thousands more current employees.

Most city retirees have a pension of less than $20,000 a year.

“You’re talking about thousands of people who need to know what to anticipate six months from now, a year, 18 months,” said Melanie Cyganowski, a former bankruptcy judge in New York. “Can I live in the same house? Do I need to sell my house? Can I afford to live in a nursing home?”

An out-of-court deal would bring certainty, she said.

“You’ve bargained something and it will be there,” said Cyganowski, a judge for 14 years.

For months, Detroit’s emergency manager, Kevyn Orr, has said two pension funds are short by $3.5 billion, about 20 percent of the $18 billion in long-term debt that the city is trying to erase at a steep discount in bankruptcy court. Retirees are even more agitated because they still don’t know how much of a real hit they could face. Orr is expected to present a plan to settle all debts by early January, a way out that still would need the judge’s blessing.

Rhodes said he’ll be very sensitive to how retirees are treated, insisting he won’t “lightly or casually” approve any cut in benefits.

Lightsey, 79, who worked in the water department and leads the Detroit Retired City Employees Association from her home in Southfield, said she doesn’t consider Rhodes’ decision this week as the last word.

Orr and his team “are ledger-driven, red ink, black ink people,” she said. “Retirees did everything they were supposed to do. They were not a drain on the system. They worked. They retired. Not one penny should be touched.”

Orr said he’s not heartless. He said he keeps a recording in his briefcase of uneasy retirees who spoke at a September court hearing.

“No one is more aware of the hardship that this is going to cause to a number of different people than me,” Orr told radio station WWJ on Wednesday.

But the reality, he added, is inescapable: “The city has no cash on hand to pay the magnitude of the debt we have.”

The narrow issue for the judge was whether Detroit met key steps to be eligible to stay in bankruptcy court and extinguish its debt. Rhodes surprised many by declaring public pensions are like any contract that can be broken in bankruptcy, even if states have protected them in their constitutions.

His opinion isn’t binding in any other case, but it at least cracks the door open for local governments or bankruptcy judges grappling with pensions elsewhere in the U.S. At least six states besides Michigan have some constitutional protections, according to the Center for Retirement Research at Boston College.

“He took a step further than anyone has yet. But it’s just a judge who is applying federal law and giving his opinion,” said Michael Sweet, a bankruptcy attorney who has advised local governments in California.

He believes Rhodes’ message has a pragmatic purpose for Detroit and lawyers representing pensioners: Get talking.

“It was an important statement. It saved people a lot of time and gave them a better sense of how they need to frame their discussions as they go into mediation,” Sweet said.

Indeed, mediation between all parties in Detroit’s bankruptcy has been going on for weeks in private in the courthouse. Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, said she filed an appeal notice immediately after Rhodes made his decision Tuesday and then stepped into another negotiating session.

“We absolutely believe a negotiated resolution is the best resolution,” Levine said. “But it seems to us the retirees are being kicked to the curb. We’re not in a position to give up a litigation route.

“If I’m living on $19,000 a year, I don’t know if I’m going to have to live on nine, 12 or some other number. These people are scared,” she said. “They don’t even know what their worst day is.”