The bankruptcy reorganization plan for the City of Detroit calls for an $18 billion reduction in debt and liabilities, including painful cuts in municipal pensions. The plan pits retirees against bondholders and banks — a battle the former city workers are likely to lose.
The Chapter 9 plan, proposed by emergency manager Kevyn Orr, could push some retirees out of their homes. Detroit’s financial situation is dire, and all of its constituents must absorb the fiscal repercussions that will come from a new approach to city spending. But it is difficult to see how many of the retirees would survive such deep cuts.
The plan calls for pension reductions and the elimination of cost-of-living increases over the next decade. The proposed cuts are appropriately modest for police officers and firefighters, because they do not receive Social Security benefits. Under the plan, they would get a 4 percent cut if they accept its terms — or a 10 percent cut if they continue to fight it in court.
Nonuniformed employees are subject to a 26 percent reduction in their pensions — 34 percent if they don’t agree to terms of the plan in a timely manner. The average pension for a civilian retiree is about $19,000 a year.
A 26 percent cut would decrease that income to $14,060 a year, or $1,171 a month. That is not a lot of money, even if retirees accept the reduction without putting up a fight.
There is a $815 million commitment from foundations, the State of Michigan, and Detroit Institute of Arts donors to save the city-owned museum collection and to help cover pensions. That commitment is not enough. The Michigan Legislature and Gov. Rick Snyder need to step up and provide more than the $350 million Mr. Snyder has pledged to push for out of state coffers over 20 years.
Detroit did not get into its mess alone. The constant decline in state revenue-sharing with local governments contributed to the city’s inability to pay its bills. There have been decades of mismanagement in the Motor City, but also anti-Detroit sentiment that led lawmakers to slash support for Michigan’s largest city.
Banks and bondholders are asked to swallow an 80-percent reduction in what they are owed by the city. It’s likely that they too will feel compelled to fight for a bigger share. Wall Street wants to get paid, but that should not occur at the expense of vulnerable Detroiters.
Detroit’s fiscal meltdown offers a reminder that all state and local governments must manage their retirement funds prudently before it becomes too late. Detroit needs to settle its debts, but it can’t do so on the backs of workers who believed the promises that city officials made to them for years.
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