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Should Detroit Eliminate Future Pensions?

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(credit: Pat Sweeting/WWJ)

(credit: Pat Sweeting/WWJ)

By Christy Strawser, CBS Detroit

DETROIT (WWJ/AP) Detroit’s pension obligations are $3.5 billion dollars in the red, according to WWJ Legal Analyst Charlie Langton, and historically the city has borrowed large sums to pay the piper.

After the clean slate of bankruptcy — assuming it goes through — the city obviously needs to balance its books without borrowing.

But with an ever-shrinking tax base and a graying workforce, can the city afford to keep pensions as part of its employee packages?

Mayor Mike Duggan recently weighed in during a chat with Langton about whether Detroit should ditch its pension plan and opt for a defined contribution 401K-type plan.

“In the 14 years I was deputy county executive in Wayne County, we had 100 percent defined contributions, in my nine years as the CEO of the Detroit Medical Center, we had 100 percent defined contributions, and so if you were to ask people here in the private sector, the vast majority would be in a 401K type arrangement,” Duggan told Langton.

He didn’t elaborate.

Current union employees are guaranteed whatever pension benefits have been negotiated for them, but some experts believe the city should go the way of the private sector and push workers of the future into 401K plans.

Michigan Speaker of the House Jase Bolger agrees a defined benefit plan is the best path for the future, saying the state already made the switch.

“I think he’s absolutely right, state employees are on 401K, that is what most employees in the private sector receive. I think that is common sense reform,” Bolger said.

He added: “You have to look at what brought Detroit into this situation. How do we ensure that if we settle Detroit’s bankruptcy, Detroit will not return to this? We want to see a Detroit that does not lapse back into financial failure … Without a doubt, there were promises made that could not be fulfilled.”

Bolger said 401Ks allow employers to pay with the money they have in the budget, instead of trying to calculate the future, and it also gives employees more control of their own financial destiny.

“I think it would be a good idea for the future success of the city just like it was a good idea for the future success of the state.

The New York Times found Detroit has nearly 12,000 retired general workers, who in 2013 received pensions of $19,213 a year on average

The Detroit News says a 6.75 percent annual investment return is needed to sustain those retiree benefits. They blamed the pension board for “poor decisions, such as giving retirees bonuses in years when the funds are losing money” and suggested a post-bankruptcy pension oversight board is required to prevent things like the “13th check.” Without oversight, negotiation or directive, the pension board reportedly sent an extra check to all pensioners every year, which cost the city $1.9 billion.

In the meantime, Detroit and some of its unions reached a tentative deal Monday to help the city pay pensioners. The city and the Coalition of Detroit Unions, which represents more than 3,500 city workers, agreed in principle on “major aspects” of the five-year collective bargaining agreement, a court-appointed mediation team said in a statement. The coalition is comprised of the American Federation of State, County and Municipal Employees — the city’s largest — and 13 other civilian unions.

Terms of the deal were not released, but mediators said it will “provide an economically feasible agreement for the city as it emerges from bankruptcy.”

(TM and © Copyright 2011 CBS Radio Inc. and its relevant subsidiaries. CBS RADIO and EYE Logo TM and Copyright 2011 CBS Broadcasting Inc. Used under license. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)

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