Detroit Bankruptcy Risks Pensions as Cuts Ruled Possible

Detroit's Dave Bing: Bankruptcy Lets City `Move Forward'

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Written by William Selway and Steven Church

Police, firefighters and other municipal workers can no longer count on a financially secure retirement based on a city-sponsored pension.

A federal judge yesterday ruled that Detroit, the largest U.S. city to file for bankruptcy protection, may cut employees’ retirement benefits as it looks to emerge from $18 billion of debt with a sputtering economy and a declining population. The ruling cast uncertainty on the incomes of thousands of former workers of Michigan’s largest city, where pensions average $19,000 a year and were assumed to be protected by state law.

“There are a lot of hurdles before you can go into bankruptcy,” said Peter Henning, a professor of constitutional law at Wayne State University in Detroit. “It does send a message to retirees that you can’t assume that because there’s a state constitutional protection that your pension can’t be cut.”

The judge’s decision is the latest challenge to local government employees’ pensions, which guarantee fixed annual payments based on how long workers were on the job. Stung by investment losses and the failure to set aside enough money, the twenty-five largest U.S. cities have $125 billion less than they will need to pay for benefits they have promised, according to Morningstar Inc.

The shortfalls are forcing governments to put more money into their pensions and have led officials to propose lifting retirement ages, requiring employees to contribute more out of their paychecks, or put new employees into 401(k)-style accounts commonly used outside of the public sector.

Read more: http://www.bloomberg.com/news/2013-12-04/detroit-bankruptcy-risks-pensions-as-cuts-ruled-possible.html