Judge rules Detroit may reduce pension benefits as part of bankruptcy case

Kevyn D. Orr
Kevyn D. Orr, Detroit's state-appointed emergency manager, filed the city's bankruptcy petition on July 18.

Detroit was officially deemed bankrupt by Judge Steven W. Rhodes in U.S. Bankruptcy Court in Detroit on Tuesday, according to a court news release.

Mr. Rhodes also ruled that Detroit may legally reduce public pension benefits under Michigan state law.

After a two-week trial to establish the city's eligibility for protection under Chapter 9 municipal bankruptcy code, Mr. Rhodes agreed with Kevyn D. Orr, Detroit's state-appointed emergency manager, that the city should receive protection from lawsuits or other actions that could get in the way of reducing debt and cutting pension benefits.

Mr. Orr filed the city's bankruptcy petition on July 18, listing debts totaling about $18 billion, including a combined $3.5 billion of liabilities for the $3.4 billion Detroit Police & Fire Retirement System and $2.77 billion Detroit General Retirement System.

“Under the Michigan Constitution, municipal pension rights are contract rights. Therefore, because the State of Michigan authorized the filing of this case, municipal pension rights in Michigan can be impaired in this bankruptcy case, just like any other contract rights,” according to a summary of Mr. Rhodes' ruling in the court release.

In September, Mr. Orr proposed closing and freezing the city's pension plans effective Dec. 31, confirmed William Nowling, the emergency manager's spokesman.

All future employer contributions would go to a newly created 401(a) plan, and there would be no future cost-of-living adjustments with respect to accrued benefits. A 457(b) deferred compensation plan would also be created as part of the proposal.

Mr. Rhodes ordered the city and its creditors — including unions, bondholders and retiree groups — into confidential mediation sessions overseen by Gerald Rosen, the chief judge of the U.S. District Court in Detroit.

Bloomberg contributed to this story.

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