In what has been a groundbreaking case study for state and municipal pension plans, Detroit retirees agreed to a 4.5% cut in benefits and no cost of living increases. If the former municipal workers had not done so, they could have faced larger cuts and the city might have lost hundreds of millions of dollars of funding from foundations and the state. Firefighters and police were spared cuts, although they will get lower cost of living increases.
The case pits state constitutional provisions against the federal bankruptcy court, with Judge Steven W. Rhodes ruling early on that Detroit’s emergency manager manager Kevyn Orr could cut pension benefits. With the bankruptcy trial scheduled for Aug. 14, creditors face a severe haircut to outstanding loans of $1.5 billion.
Some states with similar constitutional provisions may follow Detroit’s plan as a way to limit pension payments in the future. Other states, including Illinois, are trying to use legislation to limit payments; in New Jersey, Gov. Chris Christie (R) unilaterally reduced payments to endow the state’s underfunded pension plan and balance the budget.
