Risk Free Public Pensions Not Risk Free

A Detroit bankruptcy judge made a precedent-setting argument on Tuesday that public pensions are contractual under Michigan State law, according to news reports. Though pension plan cuts are not allowed under the Michigan constitution, Judge Steven Rhodes said that they can nonetheless be cut in bankruptcy, resolving a lingering issue over which set of laws take precedent.

A judge ruled yesterday that Detroit is eligible for bankruptcy and lifted protections on state pensions, which are guaranteed by the state constitution and previously widely regarded as safe and risk free. The ruling says that public employee pensions are not protected in a federal Chapter 9 bankruptcy (even though the state’s constitution explicitly protects them), and this could have wider implications on the pensions of public employees in other states.

Quartz’s Allison Schrager tries to find an upside:

The silver lining is that states and municipalities might start to account for the true cost of what they have promised. If they can’t afford to make those promises, with today’s ruling, there’s now scope to lower accrued and future benefits to something more realistic. But it may be pensioners in depressed areas who pay the price.

So maybe not that much of an upside. [Thanks to Christian for the link!]

Photo: Patricia Drury

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