question-mark

By Ed Mendel
July 28, 2014

Bankrupt Detroit announced last week that current workers and retirees voted overwhelmingly to cut many pensions by 4.5 percent and to trim or eliminate cost-of-living adjustments.

If the plan to exit bankruptcy had been rejected, a federal judge might have imposed a proposed 27 percent pension cut, and a $816 million contribution to offset pension cuts would not be made by foundations, the state and art donors.

“I want to thank City retirees and active employees who voted for casting aside the rhetoric and making an informed positive decision about their future and the future of the City of Detroit,” the Detroit emergency manager, Kevyn Orr, said in a news release.

Retirees in a much smaller bankrupt city, Central Falls, Rhode Island, population 19,000, voted in 2011 to accept pension cuts of up to 55 percent, reduced for the first five years by a state supplement.

In California, pension debt is an unresolved issue in two cities that declared bankruptcy in 2012 about five weeks apart — Stockton on June 28 and San Bernardino on Aug. 1.

But the state law in California and the financial pressure on the two cities, both members of the California Public Employees Retirement System, are different from the situations in Detroit and Central Falls.

Only 27 states have laws authorizing municipal bankruptcies, a Pew Charitable Trusts report said last July. Two states, Georgia and Iowa, prohibit bankruptcies, and the rest have no law authorizing or prohibiting bankruptcies.

Michigan Gov. Rick Snyder appointed an emergency manager for Detroit finances, Orr, who proposed a 27 percent pension cut. A court-appointed Central Falls receiver, Robert Flanders, proposed pension cuts of up to 55 percent.

Elected city councils still control Stockton and San Bernardino finances. Stockton does not want to cut pensions, saying they are needed for recruitment. San Bernardino has only publicly proposed stretching out pension-debt payments to reduce short-term costs.

In addition to outside control, Detroit and Central Falls also received outside financial aid that reduced the amount of the pension cuts active and retired employees were asked to approve.

The $816 million Detroit “grand bargain” reduced pension cuts and avoided the sale of the city’s world-class art collection. Private foundations provide $366 million, the state of Michigan $350 million, and Detroit Institute of Arts donors $100 million.

The Central Falls pension cut of up to 55 percent is reduced during the first five years by several million dollars from the state of Rhode Island. Police and firefighters get 75 percent of their original pensions. Pensions of $10,000 a year or less are not cut.

“In many states, the difficulties of major cities such as Stockton and San Bernardino would mobilize the state government to intervene and help them recover,” the Pew report said last year. “But California offered no such aid, because it has long adhered to the belief that its cities should operate independently from the state.”

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