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Protestors rally in front of the U.S. Courthouse in Detroit where Detroit's bankruptcy eligibility trial took place October 28, 2013 in Detroit, Michigan

The pension system that contributed to Detroit’s bankruptcy is changing. Current city workers will be switched to a new pension plan at the end of the month – one in which they’ll shoulder more risk in the future.

But that still leaves an elephant in the bankruptcy courtroom: the judge’s opinion that pensions people have already earned can be modified in bankruptcy.

That's "despite the fact that pensions cannot be modified outside of bankruptcy under the Michigan Constitution,” says law professor Laura Bartell of Wayne State University. “That is the provision that has been the source of all the consternation in the pension community.”

California’s state pension system CalPERS has been particularly vocal. CalPERS is huge, with 1.7 million members.

It's also an interlocked system, says bankruptcy lawyer and UCLA professor Ken Klee. He says CalPERS invests payments from a number of municipalities.

“And so when somebody can’t pay in their share because they’ve gone into bankruptcy, it puts a burden on the rest of the pension system,” he says.

Not every state authorizes municipal bankruptcies, but California has had a bunch of them.

 

About the author

Kate Davidson is a regular contributor to Marketplace.

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