Judge Approves Detroit Pension Cuts

Situation In Mass. Vastly Different

DECEMBER 4, 2013: A federal bankruptcy judge has granted approval for the City of Detroit to move forward with its bankruptcy protection plan – a plan that will include cuts to the pensions of existing city retirees and future benefits of active employees.

When the city first filed for bankruptcy protection earlier this year, retiree and union officials moved to block any impact on public pensions, which are contributory (meaning the retiree/employee contributed through a payroll deduction) and thus thought to be beyond the reach of bankruptcy proceedings.

Not so says US Bankruptcy Judge Steven W. Rhodes, who ruled on Tuesday, December 3, 2013 allowing Detroit to include pensions as part of the city’s debt restructuring plan. The ruling, which will be appealed in federal court, will allow city officials to reduce pension benefits for existing retirees, as well as current employees.

Judge Rhodes has emphasized that he won’t accept “deep cuts” and won’t necessarily agree to any pension cuts unless the city’s final reorganization plan is fair and equitable. The city is expected to deliver an initial proposal to restructure its debt and reorganize its government operations by the end of the year.

Pension officials across the US are now pondering what impact, if any, the decision could have on local plans. Most states prohibit municipalities from entering bankruptcy. Detroit is also a unique case, which ended up declaring bankruptcy after decades of severe economic decline.

While a handful of municipalities in California have entered bankruptcy proceedings over the past decade, the problem is mostly isolated to the West Coast and in communities with little to no pension or financial oversight.

Massachusetts has one of the most highly regulated pension systems in the country, with strict investment regulation and retirement benefit laws. And unlike many other jurisdictions, Massachusetts’s public employees pay among the highest contributions into the state and local pension systems – an average of about 10%, with teachers contributing a flat 11% and State Police 12%. Overtime and similar compensation is not used in calculating one’s pension.

“While the Detroit decision does concern us, there really is no direct impact on our members or the systems here in Massachusetts,” says Association General Counsel Bill Rehrey. “We’re also confident that our pension law, which has previously been reviewed by the SJC, does protect our members’ retirement benefits.

“The key thing to remember is that we’re not Detroit. Thankfully we do not have the kind of problems that exist in other parts of the country, which are the result of the economy, bad financial management and lack of oversight. None of those conditions exist here, because of the work that our Association, the unions and others have done over the years.”

In response to the Bankruptcy Court decision, the National Conference of Public Employee Retirement Systems (NCPERS), a national organization to which the Association belongs, issued a strongly worded statement and vowed to help appeal the decision.

“The National Conference on Public Employee Retirement Systems (NCPERS) respectfully but strenuously objects  to U.S. Bankruptcy Judge Steven Rhodes’s decision to allow the city of Detroit to enter Chapter 9 bankruptcy – and cut the pensions of Detroit’s police, firefighters and city workers to resolve its financial dilemma.

“We take strong exception to the notion that retirees can be lawfully affected. Their pensions are simply deferred wages for work performed over decades. The sanctity of Detroit’s public pension plans – one for police and firefighters, another for other city workers – is guaranteed by Michigan state law. Both pension plans are well funded and can sustain most if not all of promised benefits with a relatively modest employer contribution.

“Today’s ruling is the beginning of a process – not the end. There are substantial legal issues to be settled in the U.S. Court of Appeals for the 6th Circuit and, perhaps, the Supreme Court.”