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Bankruptcy in Detroit
Detroit Offers Generous Deal to Pension Funds

Detroit may finally be entering the home stretch of its year-long bankruptcy proceedings. After months of fighting with the pension funds, the city has agreed to a tentative deal with two of the biggest funds—one covering general employees and one covering police and firefighters.

The most striking thing about the deal is how generous it is to the pensioners. For the past few months, the city has backed a plan that would have seen the general employee fund cut by at least 26 percent, while police and firefighters would have seen cuts from 6 to 14 percent. The cuts in the new deal are far, far lower. General employee pensions will only be cut by 4.5 percent, while police and firefighters won’t see any cuts at all, although cost of living increases will be lower. Health benefits may still be cut considerably, but clearly pensioners are getting a better deal than they might have under the plan the city previously backed.

The process isn’t quite over. As the NYT says, city employees and retirees have yet to vote on the deal, and other creditors are not likely to think highly of a deal that gives pensioners a slight trim while they take a haircut. The bankruptcy judge will also need to weigh in and affirm that the deal is fair to all parties before it is allowed to go through. But the city does not need unanimous consent for the deal to go forward, so the prospects for resolution of the bankruptcy look better than they have at any previous point this year.

Some questions remain. It’s clear why the pension funds would agree to a plan that is far more generous than what the city was offering before; it’s less clear how the city plans to pay for it. One troubling sign is that the city seems to be relying on more optimistic estimates of the rate of return on pension investments than it was previously, revising projections upward to 6.75 percent. If a rose-tinted view of investments is the key to funding the new deal, the city may find itself back in trouble sooner rather than later.

Another big question is how the municipal bond market will react if this plan goes through. If this is what the final deal looks like, markets may take it as a sign that when cities go bankrupt, pensions will be allowed to cut to the front of the line. That could make it more costly for many more cities to finance necessary government services.

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  • Jim__L

    The only question of justice here is, will the present or future generation of city employees and citizens have any chance of enjoying the same sort of services and pensions that current retirees are demanding?

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