In a recent blog I, like a number of other reporters, wrote about Detroit Emergency Manager Kevyn Orr’s proposed pension cuts, which were outlined in the plan of adjustment he submitted to the bankruptcy court last month. And, like others, I made mention of the fact that cost of living allowances, or COLAs, would be eliminated if the plan gets approved.

But, like most everyone else covering this issue, I left it at that, without going into any detail about what the loss of COLAs would actually mean to retirees.

As it turns out, the financial hit is a significant one, growing larger as time passes.

COLAs, for those who aren’t familiar with the term, are yearly increases to otherwise fixed payments that are designed to mitigate the effects of inflation. That $20,000 a year someone might currently be receiving almost certainly won’t stretch as far in a decade. (Just think about how much a gallon of gas cost 10 years ago, and you’ll get the idea.)

It was attorney Carole Neville, who represents pensioners in the bankruptcy proceedings under way in front of Judge Steven Rhodes, who pointed out how great an impact these COLA cuts would have, and why folks like me who are reporting on the issue shouldn’t just be glossing over how much retirees are being asked to relinquish.

“There is a misunderstanding that city's Plan of Adjustment will reduce the Police and Fire Fighters' (PFRS) pensions by only 4 percent if the retirees vote for the plan and elect to release the state and city from any and all claims for impairing their pensions,” Neville wrote in an email. “The proposed reduction in benefits for the PFRS consists of a 10 percent cut in benefits plus elimination of the supplemental pension benefit in respect of the cost of living allowance (COLA), which reduces those pensions by an additional 17 percent on the average.’”

Neville goes on to explain the true extent of the proposed cuts this way: “The effect of the loss of COLA can be seen in a simple example. A PFRS retiree, who has a $25,000 a year pension, gets a 10 percent cut and loses the COLA under the Plan. That retiree will have a pension of $22,500 for the rest of his or her life. If the same retiree has a 10 percent pension cut but continues to receive the annual adjustment provided under the PFRS pension plan, the retiree will see his or her reduced $22,500 pension grow steadily to almost $44,000 at the end of a thirty year period. The same PFRS pension with no cuts and the COLA intact would have grown steadily to a $48,000 pension at the end of 30 years. The loss of the annual adjustment must be counted in analyzing the treatment of retirees under the plan.”

Those receiving a pension from the General Retirement System (GRS) would take an even bigger hit if Orr’s plan is eventually implemented as is.

Again, Neville explained it this way: “The GRS retirees have less incentive to accept the plan. Under the Plan, GRS retirees are being asked for a 34 percent cut plus the COLA, which is 13 percent on average, plus a reduction for restitution of excess funding by some undisclosed formula. The total cut is 47 percent without the restitution. “A GRS retiree who has $21,000 pension will see his or her pension reduced to $13,800 with the proposed 34 percent cut and no COLA under the plan.”

One reason given for the discrepancy between cuts proposed for the PFRS and the GRS is that police and firefighters aren’t eligible for Social Security benefits while general retirees are. 

And what happens if the city’s retirees decide that the combined cuts are too harsh? No one can say for sure, but there is the distinct possibility that no matter how much they object, the pensioners will have to take the deal that’s being offered them.

That’s because of a provision in the federal Chapter 9 bankruptcy code known as a “cramdown.” Typically, finalization of a bankruptcy plan requires that so-called impaired creditors – meaning those taking a financial hit – are all given a say in the matter. If holders of two-thirds of the debt (in dollar amounts) and a majority in number vote in favor, then the plan gets implemented. If not, then it’s back to the drawing board until a deal that’s acceptable to most is achieved.

However – and this is a huge however – if only one impaired creditor is satisfied with the deal and decides to accept it, and the judge deems the proposal to be “fair and equitable,” then it doesn’t matter how many others object. They’ll be forced to take the deal no matter what.

As with everything else in this precedent-setting bankruptcy, though, nothing yet is certain. So, stay tuned for further updates.