Landmark ruling in Detroit could prompt pension cuts across America

Experts are warning the bankruptcy judge’s ruling that the pension funds of Detroit can take a hit as the American city restructures its plummeting finances under bankruptcy, may lead other financially uneasy cities down the same path.

U.S. Judge Steven Rhodes noted Detroit “no longer has the resources to provide its residents with basic police, fire and EMS services … the city needs help.”

Judge Rhodes also cited Detroits’s dismal finances and its USD 18 billion of debt owed to a multitude of creditors as part of his rationale for the landmark decision.

The decision is reverberating through the other Californian cities wobbling on the financial edge, and marks a watershed moment for the once lustrous Detroit.

Detroit’s legacy

Once the birthplace of America’s auto industry, and shining star of democracy, the city now adds a new historical milestone to its history – the largest bankrupt city in America.

That Detroit is broke is seen in every facet of its society.

In 1950, the city had nearly two million residents. Now it only has 684,000. These citizens have to struggle with America’s highest property tax rates, lowest property valuations, and an estimated USD 3.5 billion pension shortfall.

Detroit devotes 38% of its tax revenue to debt service; this figure is set to increase to 65% in the next half decade.

The wider picture

And it is not only Detroit’s retirees who are facing a bleak future in retirement.

Now, California, Illinois, Michigan and Pennsylvania’s financially troubled cities may also have to decide how to manage largely underfunded pension funds.

For years public-sector pensions representatives from these states have depended on constitutional provisions which protected their pensions.

Yet now, Judge Rhodes’ decision has highlighted federal bankruptcy laws do not change according to state provisions, and experts are therefore reasoning Detroit’s ruling will make it easier for other cities to make pension cuts.

In the future, any city which has troubled finances and underfunded pensions could file for bankruptcy to renege on paying pensions, they say – so long as the state they belong to allows Chapter 9 protection.

Looking forward

After the court hearing Kevyn Orr, Detroit’s emergency manager, said the city will aim to file a plan of readjustment – i.e. Detroit’s plans for financial solvency – by the beginning of next year.

Orr stated negotiations are continuing “even now,” with the city’s unions, and called upon all parties to bridge gaps and end Detroit’s bankruptcy woes.

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