Detroit’s Bailout “Plan B”: Obamacare

Zero Hedge – by Tyler Durden
When Detroit filed for bankruptcy, the city’s demands for a Federal bailout promptly rose to the surface and then just as promptly dissipated following a polite but stern rejection by the president, almost too fast and without any fight, according to some. Or maybe that is only how it appeared. According to the NYT, Detroit’s advisors may be looking at a completely different source of Federal “assistance” – a much more indirect one, even if at the end of the day, it is taxpayers who end up footing the bill. Obamacare.  
From the NYT:

As Detroit enters the federal bankruptcy process, the city is proposing a controversial plan for paring some of the $5.7 billion it owes in retiree health costs: pushing many of those too young to qualify for Medicare out of city-run coverage and into the new insurance markets that will soon be operating under the Obama health care law.
Officials say the plan would be part of a broader effort to save Detroit tens of millions of dollars in health costs each year, a major element in a restructuring package that must be approved by a bankruptcy judge. It is being watched closely by municipal leaders around the nation, many of whom complain of mounting, unsustainable prices for the health care promised to retired city workers.

Alas, “save” isn’t the right word when the money will still have to be spent as the underfunded obligation already exists. A far more accurate description of the situation is that Detroit is about to “dilute” its obligations with the rest of the US, or in other words, Detroit is about to get an indirect bailout via the recently enacted Obamacare, whose purpose, however, we hardly believe was to spread the retiree wealth, or in this case lack thereof, and have other taxpayer fill in the gaps of citizens living in bankrupt cities. Such as Detroit.
Perhaps, this is precisely what Obamacare was meant to do, and its core “insurance” role was just a diversion in order to let it become a backstop to the biggest underfunded municipal obligation in the US: unfunded retirement obligations.
Some, such as Michael Underwood below, would be delighted:

“There’s fear and panic about what this means,” said Michael Underwood, 62, who retired from the Chicago Police Department after 30 years and has diabetes and Parkinson’s disease. Mr. Underwood, who says he began working for the city when employees did not pay into future Medicare coverage, is part of a group suing Chicago over its plan to phase many retirees out of city coverage during the next three and a half years. “I was promised health care for myself and my wife for life,” he said.

Ah promises – well, sorry to break this to you Michael, but going forward they will simply be broken more and more often, especially if one is a creditor. That, unfortunately is the least of Mr. Underwood’s concerns, or those of countless others like him who suddenly realize what it means when your city, state, or country are insolvent:

Unfunded retiree health care costs loom larger than ever for
localities across the country, and the health law’s guarantee of federal subsidies to help people with modest incomes afford coverage has made the new insurance markets tantalizing for local governments. A study issued this year by the Pew Charitable Trusts found 61 of the nation’s major cities wrestling with $126 billion in retiree health costs, all but 6 percent of that unfunded.
“The Affordable Care Act does change the possibilities here dramatically,” said Neil Bomberg, a program director at the National League of Cities. “It offers a very high-quality, potentially very affordable way to get people into health care without the burden falling back onto the city and town.”

The bigger problem is that if and when this backdoor bailout of underfunded obligations is effectuated, it will by copied by all other insolvent states.

But if large numbers of localities follow that course, it could amount to a significant cost shift to the federal government. Authors of the health care law expected at least some shifting of retirees into the new insurance exchanges, said Timothy S. Jost, a law professor at Washington and Lee University who closely follows the law. “But if a lot of them do, especially big state and local programs,” he said, “that’s going to be a huge cost for the United States government, and it’s mandatory spending.”

Bingo: a municipal quasi-bailout program in healthcare (and of course sheeps’) clothing.

Many cities are also wrestling with unfunded pension programs for retirees. But health care has become an easier target for cuts, in part because of generally stronger legal protections for pensions. Still, changes to retiree health care are playing out in courtrooms. The suit Mr. Underwood joined, filed last week in Chicago, claims that the health care benefits were also protected.

Chicago, that name sounds oddly familiar? Oh yes, it is the city which as we noted over the weekend is likely to follow shortly in Detroit’s footsteps as it too is now on the edge of insolvency. So will American taxpayers foot the bill for Chicago’s “underfunded liabilities” too when it also files Chapter 9? Why not: after all America is the land of magic money trees.
Ironically, Detroit may not be eligible for such a quasi-bailout because Michigan opted out:

In an added wrinkle for Detroit, Michigan is among the states that so far have opted out of expanding Medicaid under the health care law. In such states, people with incomes below the poverty level — $11,490 for an individual and $15,510 for a couple — would not be eligible for the federal subsidies to help buy coverage through an exchange.
The law’s authors had intended for such people to become eligible for Medicaid, if they did not have it already. But the Supreme Court ruled last year that the expansion was an option for states, not a requirement. This potentially leaves a group of retirees who would be ineligible for either Medicaid or a subsidy.

That’s ok: what’s a few laws to be broken when one of the negotiating parties is a constitutional scholar? It sure won’t be the first nor last time the popular decision has been trampled.

In an added wrinkle for Detroit, Michigan is among the states that so far have opted out of expanding Medicaid under the health care law. In such states, people with incomes below the poverty level — $11,490 for an individual and $15,510 for a couple — would not be eligible for the federal subsidies to help buy coverage through an exchange.

No matter how the Obama administration plans on secretly bailing out
Detroit, one thing is certain – whatever “worked” before, will no longer
work.
Finally, those wondering how we know all of the above is on the right track, well – another bankrupt city, Harrisburg, is delighted by this “discovery” of Obamacare’s hidden bailout potential

“I’m applauding Detroit,” said Dan Miller, the controller in Harrisburg, Pa., who added that in the future a similar plan might interest his city, where a state-appointed receiver is seeking to restructure hundreds of millions of dollars of debt. “I’m hoping that Obamacare turns out to be a great solution, and I would love for our city to have the opportunity to do that.”

Of course, those who may not be as delighted about the use of Obamacare as a universal bankrupt city backstop are America’s taxpayers and, broadly, the middle class. But who cares about them: as the AP noted yesterday, they are now an increasingly more endangered species. As for the money? Fear not: in America these days it just grows on trees.