Detroit’s city pensioners vote to cut their own pensions

It’s ironic that Detroit government workers and pensioners, on the one-year anniversary of the Motor City’s bankruptcy, have voted to cut their own pensions. Their vote is part of a “grand bargain” bankruptcy restructuring that seeks private, philanthropic and state funds to help avoid massive cuts in government pensions. The bargain reduces Detroit’s debt by...

It’s ironic that Detroit government workers and pensioners, on the one-year anniversary of the Motor City’s bankruptcy, have voted to cut their own pensions. Their vote is part of a “grand bargain” bankruptcy restructuring that seeks private, philanthropic and state funds to help avoid massive cuts in government pensions. The bargain reduces Detroit’s debt by more than $7 billion.

Detroit’s government workers were left little choice but to accept cuts. The only question was how much.

Under the deal approved today, civilian pensioners approved 4.5 percent cuts to their monthly benefits and a full elimination of their annual cost-of-living-adjustment, or COLA, increases. Police and fire pensioners approved no cuts in their pensions, but their COLA will be more than halved, to 1 percent.

Without the grand bargain, civilian pensions could see cuts as large as 27 percent.

And retirees also agreed to receive only 10 percent of what they are owed in retiree health insurance benefits. The city owes $4.3 billion to retirees, but will only pay out $450 million.

Pensioners are hoping the grand bargain holds together. That bargain brings more than $366 million in funds from several nonprofit foundations and other entities, including a $195 million from the state of Michigan. A large part of those funds would go to preserve city-worker pension benefits.

Despite support from city pensioners, many creditors have not approved the grand bargain. Some, who will receive 10 cents on the dollar or less, feel they are being discriminated against in favor of city pensioners.

Beginning Aug. 14, the bankruptcy court begins its confirmation trial to determine whether the plan is legal and fair to all counterparties. There is still a chance the grand bargain could fall apart.

For city workers, the results of the grand bargain would be bittersweet.

For decades they thought their pensions were safe. They trusted their politicians to deliver retirement security. They trusted their union leaders, too.

And as a backstop, they counted on Michigan’s Constitution – which promises no diminishment of pensions – to protect them.

But nobody ever told Detroit’s government workers that all those promises and protections would be for naught if Detroit ever went bankrupt. In July 2013, Detroit filed for federal bankruptcy and now those workers’ pensions are being cut.

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 mismanagement and insolvency, public-sector workers will be faced with harder choices and bigger cuts to pensions than their counterparts in Detroit. Chicago’s pension shortfall dwarfs Detroit’s.

But Illinois can enact positive reforms that can fix retirements in the long term. Michigan did that in 1997, putting all new state workers on 401(k)-style plans.

Illinois should follow the state of Michigan’s lead. Creating 401(k)-style plans for new workers is the best way to start.