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Detroit Bankruptcy Judge Rules that Pensions May Be Cut

In a decision that will reverberate across the country, U.S. Bankruptcy Court Judge Steven Rhodes ruled Dec. 3 that Detroit may cut pension obligations as part of a move to relieve itself of crushing debt. While some believed that a prohibition against pension cutbacks in the Michigan state constitution would protect Detroit’s pensioners and workers in bankruptcy, Rhodes stated that it did not provide “bullet proof” protection. Detroit is $18 billion in debt, of which $3.5 billion is owed to 23,000 retirees and 9,000 workers. A plan to exit bankruptcy is slated to be completed by March 1.

“The judge’s statements regarding pensions is very telling. This is a significant decision that potentially strikes at the core of what a defined benefit plan is all about," notes Brian Graff, Executive Director/CEO of NAPA and ASPPA. “If it stands and accrued pensions are allowed to be cut, it will be historic and tremendously precedential. Other municipalities and perhaps even states will soon follow.”  

The New York Times speculated that the Detroit bankruptcy ruling will be watched closely in California and may provide clarity for Stockton’s recovery plan, which is further along than Detroit’s. A ruling affecting Stockton’s plan did not seem to affect pensioners — a ruling that one of its creditors, Franklin Templeton, appears ready to challenge. Meanwhile, other California cities in bankruptcy, like San Bernardino, for example, have stopped making payments to CalPERS. And the City of Vallejo emerged from bankruptcy in 2011 without reducing pension obligations.

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