Mediating Detroit’s Pension Disputes: The Process Explained (Updated with Responses 3/24/16)

By Donald L. Swanson

40 people are in the room at the first mediation session about Detroit’s two pension plans.  There aren’t enough chairs in the room to go around, so the mediator, Eugene Driker, stands for the entire four-hour meeting.

This is an unusual mediation:

• Its issues and disputes are newly joined, so the initial mediation session focuses on basic things like, (i) listening to people tell their stories, and (ii) trying to figure out who everyone in the room might be.
• It’s occurring because the Bankruptcy Judge for the Detroit case has created a mandatory and proactive mediation process.

Since the mediating parties haven’t been through discovery, the biggest issues at the end of the initial mediation session are about such fact questions as:

• Is the shortfall in proper funding of the two pensions actually $3 billion (with a “b”), as the City’s Emergency Manager contends?
• Or has the City been “cooking the books” to create this large number, as the pensioners insist?

To begin addressing the fact issues, two things happen:

• First, the mediator works at whittling down the number of people involved in the mediation to a manageable group of critical parties and their legal counsel, actuaries and financial advisers.  This whittling down process is difficult because everyone wants to be in the room—but it must be done to accomplish the task at hand.

• Then, the mediator works with these people to discuss, address and resolve the disputed $3 billion fact issues.

Once fact issues are resolved, the parties turn to addressing and resolving the shortfall amount.

Instead of anticipated 20% to 30% cuts in pension benefits, the parties achieve, (i) no cuts in basic pension benefits and a reduced cost of living adjustments for one pension plan, and (ii) a 4.5% cut in basic pension benefits and an elimination of cost of living adjustments for the other pension plan.

Such achievements for the two pension plans take a year of time, many sessions and lots of patience to accomplish.

During such time, the parties focus on non-economic issues.  Mr. Driker says the non-economic issues are “important subtexts” in all efforts to resolve public policy issues like the pension disputes.

The parties also focus on what will happen to the pensions and future benefits if no deal is made.  The Bankruptcy Judge issues a crucial ruling, early in the case, that helps in this regard:

• The Michigan Constitution contains a provision that government worker pensions cannot be diminished or impaired—the pensioners view this provision as inviolable.

• The Bankruptcy Judge rules, however, that Bankruptcy Code provisions trump the State Constitution provision—such ruling helps motivate the parties to reach a settlement.

Notably, the Bankruptcy Judge, who created this mediation process, also supported and prodded the mediation process with subsequent rulings like this one.

Footnote:  This is the second in a series of five articles about the Detroit mediation process, based on interviews with Eugene Driker, a Deputy Mediator in the Detroit Bankruptcy.

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RESPONSES RECEIVED — as of 3/24/16 at 9:17 a.m. (central)

“Comment on the mediation article referenced below.

The article seems to lead to a conclusion that all that was needed to move from an initially estimated 20-30% cut in pension benefits to a 0 – 5% cut was skillful, patient mediation.

There is no doubt that the mediation employed was critical and expertly performed, but the article leaves out a critical element in the resolution of the Detroit pensions.

Approximately $800 million in new money was committed by foundations, the state, and individual donors to the Detroit bankruptcy, albeit with strings attached. The mediators skillfully worked out the deal whereby these funds saved the Detroit Institute of Art’s collection (owned by the city) from creditor claims and reduced the pension shortfall, while indirectly helping other creditors by resolving the pension claims.

View the Article Foundation Support Is Crucial in Plan to Save Detroit’s Art and Pensions.

Without these or other new funds, no amount of mediation could have achieved the improvement in the pension funds’ situation.”

David Priestley, Principal, Plante & Moran, PLLC.