January 22, 2014

Detroit Bankruptcy Ruling Cuts Pensions

detroit bankruptcyLast month, U.S. Bankruptcy Judge Steven Rhodes declared that the city of Detroit was eligible for the largest ever municipality bankruptcy, which was not shocking in the least to those who have been following the city’s financial struggles. What did surprise many, however, is that the judge ruled that the Michigan constitution provision protecting pension cuts was superseded by the federal bankruptcy law stating that contract rights are at risk for cuts. This is life changing news for Detroit residents at or approaching retirement age. These people believed their pensions to be untouchable despite the state of the city because they live in one of only seven states with such a provision in its constitution. According to Judge Rhodes, city workers in a bankrupt city are the equivalent to employees at a bankrupt company under law. Now, many relying on those pensions have little time or ability come up with a back up plan. These people will receive much less than they were promised, in some cases less than $20k each year, and have much less retirement security. Many retired individuals are considering applying for new jobs, but are concerned about competing with much younger applicants.

American Federation of Teachers President Randi Wiengarten, who has worked as a lawyer in the past, plans to appeal this ruling. She believes that pensions should legally be considered deferred wages instead of contract rights, which would mean they are excluded from potential cuts. Wiengarten believes about 4,000 of her union’s members will be affected by this bankruptcy ruling, but has voiced concern about attempts to cut pensions in other states as well. Across the nation, pensions are going unfunded and many city governments may soon find themselves in a similar situation. Regarding the topic, William McGurn of the New York Post recommends that city governments come up with defined-contribution retirement plans that use annuities to prevent future issues.

To learn more about Detroit’s journey from one of the wealthiest cities in America to the largest municipality bankruptcy, click here.

Posted In: Bankruptcy