If the federal bankruptcy court sorting out Detroit's financial mess allows the city to cut pensions, other cities and states may try to take that route to deal with their lopsided liabilities, an investment manager whose company oversees $26 billion for endowments and pension plans warned on Monday.
Detroit Emergency Manager Kevyn Orr wants to reduce pension benefits for thousands of retired and current city employees. In its Chapter 9 bankruptcy filing, the city claimed $3.5 billion in underfunded pensions. That's nearly 20 percent of all of the city's total debts of $18.5 billion.
"Michigan has a law, which says, it's basically a general obligation of the city of Detroit to pay pensioners," Commonfund CEO Verne Sedlacek said on CNBC's "Squawk Box." His comments came days after Michigan Attorney General Bill Schuette said he's prepared to intervene to defend the state's pension protections against any impairments.
Last Wednesday, the U.S. bankruptcy judge overseeing the case suspended legal challenges from public employee unions and pension funds in Michigan state courts while he reviews the city's petition for protection from creditors. The judge did say that retirees have raised "very serious questions" in their complaints.
Sedlacek agreed: "If it appears that states, particularly localities, can get out of this large pension issue by declaring bankruptcy, we may see more bankruptcies."
While bankruptcy laws vary from state to state, he did point to a recent bankruptcy case from Central Falls, R.I. "The bond holders made all their money back—got all their money. The pensions took the hit."
(Read more: How your city might pay for Detroit's money mess)