(NEW YORK) -- If Detroit is allowed to proceed with its bankruptcy filing, it could lead to painful changes elsewhere for millions of teachers, firefighters, police and other city and state workers. "There's been a belief in the public sector that these pension promises are safe no matter what," finance professor Robert Novy-Marx of the University of Rochester.
But if the court allows Detroit to reduce its pension payments, Novy-Marx says that could lead to cuts elsewhere. "It is possible this is potentially an important precedent setting case," he says. Some generous public sector pensions are seriously under-funded.
On July 18, Detroit became the biggest American city to file for bankruptcy after its emergency manager filed for Chapter 9 protection with more than $18 billion in accrued obligations. In the filing with the U.S. Bankruptcy Court in the Eastern District of Michigan, state-appointed emergency manager Kevyn Orr indicated that the city's estimated number of creditors was "over 100,000."
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