Detroit Bankruptcy Judge Approves Workout Plan

There's a light at the end of the tunnel for Detroit, its citizens and its pensioners — and it’s not the oncoming train many had expected. Bankruptcy Judge Steven Rhodes approved a plan Nov. 7 that will alleviate $7 billion in debt and invest $1.7 billion in needed services, while cutting pension benefits for retired city and municipal workers. When the proceedings began, Detroit had $18 billion in debt, including a significantly underfunded pension and an ongoing deficit.

The groundbreaking process was completed in just 16 months — swift compared with the municipal bankruptcy workouts in Vallejo and Stockton, California, which took three years and 27 months, respectively. 

The Detroit plan pitted pensioners’ rights protected under the Michigan state constitution against the requirements of federal bankruptcy law. In the end, reason triumphed, with retired general and municipal workers accepting a 4.5% cut in payments, no cost-of-living adjustments, higher health care payments and forfeiture of previously received improper payments. Fire and police retirees fared a bit better.

While no one is predicting that the many states and municipalities facing substantially unfunded pension liabilities will now rush to bankruptcy court, the precedent set in the Detroit case could lead some groups to be more willing to negotiate — even with seemingly ironclad laws and agreements in place protecting pensioners’ rights.