On April 15, Detroit city employees and retirees breathed a huge sigh of relief after the city’s emergency manager and its pension fund managers reached a deal that would significantly reduce proposed cuts to pension benefits, CNNMoney reports. Some civilian workers will face a 4.5% reduction in pensions and lose cost-of-living adjustments. Retired public-safety workers were spared from cuts and promised almost half of their expected annual pension increases.
The tentative resolution of the pension negotiations marks a significant milestone in the city’s attempts to exit the bankruptcy it declared in July 2013.
This February, Kevyn Orr, Detroit’s emergency manager, proposed pension cuts of up to 34% for most retirees and up to 14% cuts for former police officers and firefighters. Unfunded pension liabilities make up $3.5 billion of the city’s $18 billion on debts, according to the New York Times.
“Pressure makes diamonds,” bankruptcy expert Michael Sweet told CNNMoney when asked about the deal, which must still be approved by Detroit’s bankruptcy judge, Steven J. Rhodes, and by employees and retirees.
The agreement relies on funding from a “grand bargain”—a pledge of $816 million toward retiree pensions from private foundations, state officials, and the Detroit Institute of Arts.
It also rests on potentially shaky ground: revised estimates of returns on pension funds, which the city bumped up from 6.2-6.5% to 6.75% based on a bullish 2013 stock market. The federal bankruptcy judge is expected to consider whether the city’s revised estimates are overly optimistic.
The deal offers three lessons for business negotiators seeking to resolve complex disputes:
1. Capitalize on the other side’s impatience. The city’s backtracking on its proposed pension cuts reflects the desire of leaders to move beyond the bankruptcy, which has cost Detroit millions in legal and consulting fees, and return its focus to city services, according to CNNMoney. The pension funds were able to benefit from the city’s impatience with the negotiation process and eagerness to wrap up a deal.
2. Revise estimates with care. In its haste to reach a deal, the city may have fallen victim to over optimism, a common bias in negotiation, when revisiting its expected returns from the pension funds. The decision to base projections of future returns on a strong year for the stock market could prove to be short-sighted.
3. Recognize a good deal when you see one. Most Detroit workers and retirees appear to be pleased by the pension deal, which was much more heavily slanted in their favor than expected. A small number, however, expressed displeasure with the prospect of accepting any pension cuts at all and by the particularly good deal reached for public-safety workers. Business negotiators would be wise to remember that our perceptions of what constitutes a fair deal are highly biased by our perspective. By broadening our focus, we can reach a more rational view of the offer on the table.
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