09.12.13

Post-Retirement Health Care. A key issue in the Detroit bankruptcy will be how to finance post-retirement health care benefits for its retirees. Insolvency, occurring nearly simultaneously with the implementation of the federal Affordable Health Care act, led Detroit Emergency Manager Kevyn Orr to make clear last June that he intended to modify Detroit’s benefits by moving retirees into either the state health care exchanges or Medicare; but he has not publicly disclosed specifically how much assistance the city would be offering retirees who would have to buy insurance under the Affordable Care Act. Yesterday, at a presentation to the Detroit General Retirement System, Lamont Satchel, Detroit’s labor relations director, reported Mr. Orr is considering a plan to replace current health care benefits for retirees under 65 with a stipend of $125 a month to buy coverage beginning next month from the state’s new health insurance exchange. The plan to provide a $125 monthly stipend is not final, although Mr. Orr expects to make a final decision as early as this week. Under such a proposal, the city would assist retires in figuring out the best health insurance plan offered under the Affordable Care Act. Michigan’s insurance marketplace, where the plans will be sold, launches October 1st; coverage is effective Jan. 1. Retirees over 65 would transition to Medicare. Still unknown is how much health care coverage the proposed stipend of $125 a month would buy, because neither the state nor insurers are saying how much plans available under the new health care system will cost. With nearly half of Detroit’s 21,000 retirees under 65, one attorney representing two Detroit retiree associations, warned that the $125 monthly stipend “would be a relatively small percentage of what is currently being paid in health care benefits.” The dilemma for the city, according to the Emergency Manager report, is that unfunded retiree health care liabilities make up nearly $6 billion of the city’s $18 billion in long-term obligations, according to a report Orr filed to support the city’s bankruptcy filing. The plan previewed yesterday would reduce the city’s annual health care costs for retirees from $170 million to $50 million or less, according to Mr. Satchel. The proposal would apply to both of the city’s pension funds — the General Retirement System and the Police and Fire Retirement System. The vast majority of Detroit’s retirees receive modest annual pensions. Retired Detroit police officers and firefighters on average receive about $34,000 a year; retirees from Detroit’s general city pension fund receive less than $20,000.

Current Health Care Benefits. Mr. Orr has also proposed a modification in health care benefits for current employees, even as the newly created nine-member committee representing some 20,000 retirees yesterday filed an objection to the city’s eligibility for federal bankruptcy protection. The General Retirement System yesterday agreed to contribute more than $1.3 million toward active employees’ new health care plans. Under the plan Mr. Orr offered last month, which he estimates would save the city $12 million annually, there would be increased deductibles and caps on out-of-pocket costs.  Annual deductibles for single city workers with no dependents would increase from $200 to $750; total out-of-pocket expenses would be capped at $1,500 under the plan. For married employees with a family, annual deductibles would increase to $1,500, and out-of-pocket expenses would increase from $3,000 to $4,500. Employees would continue to pay 20% of premium costs, and co-pays for prescription drugs and doctor visits would stay the same. The city will continue to offer vision and dental plans.

Judging or Gambling? Bond insurer Syncora Guarantee, Inc. yesterday filed an appeal with the U.S. District Court challenging U.S. Bankruptcy Judge Steven Rhodes’ decision last month to block the insurer’s ability to freeze casino revenue that acts as collateral on the city’s interest rate swaps—marking the first appeal in Detroit’s municipal bankruptcy case. The appeal will likely have two immediate impacts: significantly increased costs and a much longer, drawn out process. Every extra hour in the courtroom will consume time, resources, and dollars: leaving an ever decreasing pot to meet the needs for the provision of essential services and resources to meet pension and post-retirement benefits, or as the incomparable Jim Spiotto, perhaps the most renowned municipal bankruptcy expert in the country states: “All these fights cost money….Chapter 9 is like open-heart surgery — the longer you stay under the knife, no matter how good the surgeon, the greater are the consequences.” Last month, Judge Rhodes held that Syncora cannot order the swap custodian to freeze the casino revenue, because Syncora is not a participant in the swap agreement, which is solely between Detroit and the counterparties; moreover, he held that the casino revenue is subject to the automatic stay under chapter 9, because it is owned by the city, and that the monthly flow of the funds into the custodian’s accounts is merely an administrative action and not due to a lien by Syncora. Syncora has already deposed both the Emergency Manager and the city’s investment banker as part of the dispute. Earlier this week, Syncora deposed an executive at Ernst & Young, which put together the city’s revenue projections before its municipal bankruptcy filing. The critical issue for Detroit is the fate of the settlement, which would give the Motor City access to the roughly $180 million in annual casino revenues, or as Municipal Market Advisors have noted:  “The agreement seems to have at least one additional, significant benefit to the city beyond unfettered access to the casino revenues: the ability of the city to move forward under the settlement without third-party liability concerns…Perhaps, the added benefits of closure — and the potential relief from exerting potentially a significant amount of time and money associated with litigation on potential issues related to the swaps — made the swap settlement more valuable to the city than we originally estimated.”

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