"He is not making any benefit cuts," Mr. Nowling added.
For Detroit's retirees, it's a different matter. They are not being asked to give up benefits they had hoped to earn in the future; they are being told they must give up benefits they have already earned. Michigan's constitution forbids this, so Mr. Orr is using the Chapter 9 municipal bankruptcy process, in which federal law applies. A bitter battle is already taking shape.
By the time the fate of the retirees has been decided, Detroit's workers will already be earning hybrid benefits. To shift the investment risk their way, Detroit has set up a series of eight "levers" to pull if the plan's investments falter. They include setting up a reserve fund that must be used to cover losses, raising the workers' required contributions, lowering retirees' cost-of-living increases and making workers build up their benefits more slowly.
Should investments not produce the expected returns — in a protracted bear market, for example — leaving too little money to meet all obligations, officials will be required to pull as many levers as it takes to get the plan back to the 100 percent funded level within five years. Only if all eight levers are pulled and the plan is still not responding adequately can Detroit's taxpayers be called on to rescue it.
To measure the level of funding, the plan will assume a 6.75 percent rate of return. That still allows for a substantial amount of risk, although it is less than the 7.9 percent assumption the city was using when it declared bankruptcy. Officials of the American Federation of State, County and Municipal Employees, which led the negotiations, did not respond to calls seeking comment. The union is one of 48 that represent Detroit's municipal workers.
Even as they were negotiating the hybrid pension plan, Detroit's unions were still appealing a ruling last December by Judge Rhodes that pensions could be cut under federal bankruptcy law, despite protective language in Michigan's constitution. The unions are required to drop the appeal if they vote for Detroit's plan of adjustment. From California, Calpers has asked to serve as a "friend of the court" in the appeal, saying Judge Rhodes's decision "raises issues that are of critical importance to Calpers and its 1.7 million members."
Calpers's brief argues that Judge Rhodes ruled improperly and asks the United States Court of Appeals for the Sixth Circuit to vacate his finding that state laws protecting pensions are not binding in bankruptcy cases. Although California's laws have no force in a federal case in Michigan, Calpers expressed concern that rulings concerning Detroit's bankruptcy might recast the legal landscape in California.
"Such a precedent can be, and has been, misconstrued for the broad proposition that all pensions are subject to impairment in Chapter 9," the Calpers brief said.
—By Mary Williams Walsh, The New York Times