Detroit’s bankruptcy is starting to hit home for 28,500 current and retired city workers who are getting the first glimpse this week at drastic cuts to their health insurance plans.
Emergency Manager Kevyn Orr announced sweeping changes Monday to health insurance for active and retired workers slated to take effect Jan. 1. The changes will likely face a legal backlash as the city fights to win court approval for bankruptcy protection from its creditors.
The changes mark the first major dent Orr is attempting to put in the city’s legacy costs at the center of Detroit’s bankruptcy case as he seeks to shift more of the cost burden onto employees and retirees.
City officials began sending notices late last week to about 8,000 retirees under age 65 that Detroit is axing their city-paid $605 per month retiree health insurance coverage ($1,834 for families) and instead giving them a monthly $125 payment to use towarda private plan on the federal health insurance marketplace exchanges.
Disabled retirees under age 65 will get a $200 monthly payment for their health insurance needs.
More than 10,500 retirees over 65 will be offered a Medicare Advantage plan with city-funded premiums, but will be responsible for paying their deductibles and secondary insurance coverage, according to the plan.
Detroit’s 10,000 active city workers will see their individual deductibles nearly quadruple from $200 annually to $750, while employees with families on the city’s insurance will see their maximum annual out-of-pocket costs rise 50 percent from $3,000 to $4,500.
Attorneys for Detroit and its numerous creditors are set to begin arguing today in a federal court over the city’s eligibility for bankruptcy. If U.S. Bankruptcy Judge Steven Rhodes determines Detroit meets the criteria for bankruptcy, Orr has signaled his intent to make deep cuts to retiree health care after labeling it an unsecured debt.
Unlike contractual public pension benefits, retiree health insurance does not have state constitutional protections.
John Pottow, a bankruptcy law professor at the University of Michigan, said Orr may be challenging a gray area in the Chapter 9 municipal bankruptcy law that doesn’t spell out whether he needs court approval to make sweeping changes to city employee compensation.
Pottow noted Orr didn’t seek the judge’s approval to enter into a non-monetary lease with the Michigan Department of Natural Resources to operate Belle Isle as a state park.
“Unless someone objects to it, maybe they’re operating under the assumption that they don’t need to get court approval for the normal course of business,” Pottow said. “If this were Chapter 11 (corporate bankruptcy), he would unquestionably need the court’s approval to make a big wholesale change.”
A committee representing retirees in the bankruptcy case blasted the changes Orr is imposing, saying they would “eviscerate” insurance benefits promised to retirees as deferred compensation during their public service. The committee claimed Medicare-eligibile retirees could see their deductibles rise $500 and prescription drug costs increase 200 percent to 1,000 percent, depending on the medicine.
“These reductions, coupled with the city’s threatened pension reductions, (are) Draconian, inhumane and unprecedented,” Terri Renshaw, chairwoman of the retiree committee, said in a statement.
The committee’s attorneys were scrambling Monday to understand how Orr was imposing changes to long-standing health insurance obligations without the bankruptcy judge’s approval.
But Renshaw, a retired city attorney, signaled a court battle looms over the cuts.
“Exposing thousands of retirees on fixed and limited incomes to this burden is unacceptable and we will spend the days and weeks ahead fighting this plan,” said Renshaw, whose committee was set by the bankruptcy court to negotiate with Orr.
Orr spokesman Bill Nowling said the taxpayer-funded retiree committee is mischaracterizing the city’s benefit changes, which Orr is implementing under his powers as an emergency manager.
“We obviously disagree in the strongest possible way with the characterizations made by the retiree committee,” Nowling said in a statement. “Its comments continue to show a complete and total disregard for the financial crisis in which the city of Detroit and its 700,000 residents find themselves.”
Prior to the changes, Detroit’s employee and retiree health insurance expenses were on pace to top $263 million in the 2014 fiscal year, including $105 million to provide secondary insurance for Medicare recipients and $71 million for retirees under age 65, city budget records show.
The changes in insurance coverage will reduce the city’s annual retiree health insurance costs by $142 million, Nowling said.
Orr consultants have concluded unfunded retiree health care liabilities alone account for $5.7 billion of the city’s $18.5 billion in debts.
“Our goal has always been to provide quality coverage that the City can reasonably afford, and we have done that,” Orr said Monday in a statement.