Can Local and State Governments Scale Back Pensions of Public Servants?; Detroit's Bankruptcy Could Involve Pension Cuts for Current and Future Retirees

Big day looms for Illinois, Detroit pensions

November 29, 2013

MarketWatch - For anybody who wonders whether state and local government pensions have a sustainable future, Dec. 3 will be a day to stay glued to the news. That’s the day when a state legislators’ vote in Illinois and a federal bankruptcy court ruling in Detroit could help determine whether those respective governments can scale back pension benefits in an attempt to get their financial affairs in order.

Illinois has the worst-funded pension system of any U.S. state, with only about 45% of the assets needed to cover the obligations of its pension funds, according to a study by the Pew Center on the States. That shortfall has jacked up the state’s borrowing costs (Illinois now has the lowest credit rating of any state).

But a bipartisan group of legislative leaders and Gov. Pat Quinn, a Democrat, reached a tentative pension-reform agreement earlier this week that’s designed to cut pension costs by $160 billion over 30 years. Mark Peters and Al Yoon report in The Wall Street Journal that the deal would involve “reducing cost-of-living increases for retirees, raising the retirement age for younger workers and capping the salary amount used to calculate pension payments.” Votes on the plan are expected when the legislature reconvenes Tuesday.

In Detroit, meanwhile, federal bankruptcy court Judge Steven Rhodes is expected to rule Dec. 3 on whether that city is legally eligible for Chapter 9 bankruptcy protection. As MarketWatch’s Ben Eisen has noted, public pension obligations account for as much as $3.5 billion of the city’s $18 billion in debts, and most of the parties involved anticipate that any post-bankruptcy plan would involve pension cuts for current and future retirees.

Public-sector unions and retirees, not surprisingly, oppose any proposed cuts to benefits — and whatever takes place next week in Illinois and Detroit is unlikely to represent the final word. Most notably, both the Illinois and Michigan state constitutions protect public workers’ pension rights, giving retiree groups more ammunition for court fights to come.