Federal judge approves Detroit pension cuts
A federal judge approved Detroit’s historic Chapter 9 bankruptcy, allowing the city to shave off $7 billion in liabilities from a total debt of $18 billion.
State and local governments across the nation have watched Detroit’s bankruptcy proceedings closely, wondering if cuts to public employee pension benefits would be approved. On Nov. 7, they got their answer. A federal judge approved Detroit’s historic Chapter 9 bankruptcy, allowing the city to shave off $7 billion in liabilities from a total debt of $18 billion.
Pensioners voted on benefit cuts earlier this year during the bargaining process. Among the general retirees who chose to vote, 73 percent voted to take a 4.5 percent cut in their pension benefits and eliminate their cost of living adjustments. For the police and fire funds, more than 80 percent voted to cut their cost of living adjustments.
Retirees will also see a 90 percent cut in their health-insurance benefits.
Cuts to pension payments and other retirement benefits would have been much worse had it not been for the “grand bargain” – where foundations, private donors and the state of Michigan contributed $816 million to help pay for public employee pensions and protect the art collection at the Detroit Institute of Arts.
Judge Steven Rhodes called the city’s settlement with pensioners a nearly “miraculous” outcome and overruled all objections to the city’s plan, according to the Detroit Free Press.
For decades, public employees thought their pensions were safe – Michigan’s state constitution promises to protect pension benefits. Employees trusted their politicians to deliver retirement security.
But the Detroit bankruptcy ruling shows that when the money runs out, pension benefits are at risk regardless of what the state’s constitution says.
The results of Detroit’s struggles in bankruptcy should be a lesson to Illinois, the city of Chicago and other local governments.
If Illinois continues down the same path of politician-run pension plans, public employees will be faced with harder choices and bigger cuts to pensions than their counterparts in Detroit. Chicago’s pension shortfall dwarfs the Motor City’s.
Today, the Chicago firefighter’s pension fund has only 24 cents on hand to pay for every dollar of future benefits. The state’s five pension plans, just 41 cents. With funding levels like these, retirement security under pensions is a false promise.
Illinois should immediately move forward with positive reforms today instead waiting until it’s too late. It’s time to take politicians out of the retirement businesses and give public employees control over their own retirements with 401(k)-style plans.
States across the nation are ditching their politician-run pension plans and choosing to give public employees control over their own retirements with 401(k)-style plans. It’s time Illinois followed suit.