In a pension shot heard ‘round the world, a ruling has come down in Detroit’s bankruptcy case that will have implications far beyond the city’s limits: in a surprise decision, U.S. Bankruptcy Judge Steven Rhodes has ruled that pensions can legally be cut during the city’s bankruptcy process.
Kevyn Orr, Detroit’s emergency manager, has said in the past that significant pension cuts for both current and retired workers will be necessary to dig the city out of its financial hole. But pensions are heavily protected in Michigan, thanks to a provision in the state constitution that categorizes public pensions as “contractual obligations” which are protected from being “diminished or impaired” under any circumstances.
But now that’s changed.
“Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy,” Rhodes said in his ruling.
Detroit is facing the financially toxic reality of having twice as many pensioners as active employees. It remains to be seen whether (and to what extent) the city will move forward with the cuts, which are sure to be politically painful. But now, for the first time, the city has the legal go-ahead to do so.