Judge in Detroit Bankruptcy Case Denies Any Special Protections for Pensions (Posted on December 5, 2013 by Carol V. Calhoun)

Judge Steven W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan had now issued an opinion stating that the bankruptcy proceedings for the City of Detroit can go forward. The opinion provided no special protections for as yet unfunded pension benefits (although benefits already in the pension funds were protected). The judge rejected a contention that Michigan constitutional provisions prohibiting impairment of pensions would provide protection to promised but unfunded benefits.

This development is obviously immediate bad news for Detroit workers and retirees. It also has implications for other public employers and their retirement systems. As discussed in “Detroit’s Bankruptcy Highlights Risks, Benefits of Governmental Pensions,” public retirement systems lack some of the protections of private plans, but have other protections that private plans do not. This decision suggests that the protections for public retirement systems may be less than some had assumed. Some potential fall-out, outside of Detroit:

1. Public employers may have a harder time attracting and retaining employees, if employees do not consider promised pension and retiree health benefits to be reliable.
2. Public employers may tend to respond to #1 by skewing compensation more toward current pay and benefits, rather than retiree pensions and benefits, in order to attract employees. However, this may ultimately have a negative effect on retirees’ financial health, in turn providing more pressure on government social services. Thus, the increase in current costs may not be matched by an equal decrease in future costs.
3. Unions may be more inclined to negotiate for higher current funding of plans, rather than just promised benefits.
4. Public employers and unions representing public employees may increasingly emphasize defined contribution plans over defined benefit plans.
5. There may be increased legislative efforts to include public employers in Social Security, if their own plans are considered risky. (Currently, public employers in many states need not cover employees under Social Security if the employees are covered by a retirement plan that meets certain requirements.)

Obviously, developments in this area bear watching for public plans generally.