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The city of Detroit can renege on its pension obligations to work its way out of bankruptcy.
U.S. Bankruptcy Judge Steven Rhodes said the city would have to justify any deep cuts, but is allowed to stay in bankruptcy court and wipe out $18 billion in debt, according to The Associated Press. He also said the city should have filed for bankruptcy a long time ago, and will have until March 1 to come up with a plan.
About half of the $18 billion will come from underfunded pensions and health care costs, the AP says. The city will have to negotiate pensions for about 23,000 retirees and 9,000 workers. According to the city’s emergency manager, Kevyn Orr, pension funds are $3.5 billion short and most who are collecting now get less than $20,000 a year.
Critics of the bankruptcy effort have argued that Michigan’s constitution should protect city pensions from cuts, CNNMoney says, but Judge Rhodes said federal bankruptcy law trumps state law. Should they be cut, Detroit will become the first bankrupt city to ever impose involuntary pension cuts, an expert told CNNMoney.
The city is looking at other ways to shed debt, including selling off an art collection worth hundreds of millions and a water department that serves a large portion of southeastern Michigan, the AP says.
With their pensions on the chopping block, some retirees may have to return to work. But jobs could be especially hard to find for older Americans.