Grand Bargain, “Miraculous” Settlement Paves Detroit Bankruptcy Exit

In a settlement agreement described as “miraculous” by the federal bankruptcy judge that approved it, and made possible because of a pension settlement and a “grand bargain,” the City of Detroit now begins its exit from bankruptcy.

For Detroit’s Police and Fire Retirement System (PFRS) retirees, though there will be no reduction in the accrued pension benefit amount, there will be a 45% reduction in the cost of living adjustment (COLA). For General Retirement System (GRS) retirees, the adjusted pension amount is a 4.5% reduction in accrued pension benefit amount and elimination of COLA.

The so-called “grand bargain” includes commitments from the State of Michigan, a number of charitable foundations, the Detroit Institute of Arts and a number of individuals to contribute to Detroit’s two pension plans a total value of $816 million over 20 years.

Key Pension Points

Among other items, the key points of the pension settlement include the following.

• Through June 30, 2023, the pension plans will use a 6.75% discount rate to value the liabilities and a 6.75% assumed investment return rate to estimate the future growth of their assets.
• The pension plans will be frozen as of July 1, 2014.
• Active employees continuing to work for the City of Detroit after July 1, 2014, will have benefits under new hybrid pension plans, though the pension formulas contained in the new hybrid plans are less generous than those in the present plans.


Until June 30, 2023, the settlement says that the parties may not amend the terms, conditions and rules of the GRS and PFRS relating to the calculation of pension benefits, the investment return assumptions, or the contributions to the pension systems.

Majorities of both pension classes voted to accept the plan; 82% in class 10, PFRS, and 73% in class 11, GRS.

In an oral opinion in In re City of Detroit, Bankruptcy Court Judge Steve Rhodes noted that, in the court’s eligibility opinion, it held that the federal bankruptcy power could impair pension right in a municipal case, even if the state constitution protects those rights — and affirmed that he stood by that decision.

While the case was settled in less than a year and a half, it took more than two years for Stockton, California, another municipality bankruptcy with pensions in the mix to emerge.