Detroit Bankruptcy

By Jeff Monahan

“The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.”

-     Article 9, Section 24 Michigan State Constitution

Whew.  It’s a good thing the state legislature had more foresight in 1963 than the City of Detroit has had since then.  The city filed for bankruptcy last week and if it weren’t for that amendment, approximately $3.5 billion in pensions owed to government employees could have vanished.

Eighteen billion dollars is the size of the hole Detroit must dig itself out of.  Once a booming metropolitan area, it only hosts 700,000 inhabitants now.  Most moved to the suburbs or out of state, slowly, since its peak in the 60s.  The city is now left with thousands of abandoned buildings with no one to move into them and an intimidating crime rate without the police (average 58 minute response time) or fire departments to keep pace.

It is hard to have a conversation involving the word “Detroit” without bringing up the word “union.”  The city has been the host to the automotive industry for a century now so the union culture is engrained into the lives of southeast Michigan families.  Although the state constitution only protects public pension contracts, the amendment undoubtedly was influenced by the working class culture that began at Ford, GM, Chrysler, etc.

This culture has been attacked recently by Michigan governor Rick Snyder.  For two years Snyder insisted that he had no intention of passing Right to Work legislation, which inhibits the ability of unions to collect dues.  Then he pushed that exact legislation through in less than four hours.  Now faced with the question of how to approach the bankruptcy problem – although the City of Detroit operates independently of the state government – there is no question that Snyder would love to get rid of those pension debts.  Thankfully the state constitution prevents him from doing this, and he is further handcuffed by the political pressure of reelection.   Ironically, he defended the bankruptcy filing by claiming it was about government accountability.

But the pensions may not be safe after all.  In some instances, bankruptcy law supersedes state contract laws, even if the state constitution expressly protects the contract rights.  Secondly, bankruptcy is, arguably, designed to protect those who cannot pay current bills, so future obligations could receive different treatment.  This could call into question the ongoing health care provisions for pensioners, and the pensions that are not yet vested in current employees.

My prediction is that the pensions are, for the most part, safe.  It’s hard to imagine getting out of a $18 billion hole without some government-imposed cutbacks to current employees.  The lesson is to keep a very close eye on the action Snyder takes and how it affects unions.  He will spit well-crafted political blabber to cover up his true motives like he did before and we can’t let that blind us.  Bankruptcy is a very complicated area of law so it will take years to sort out all the details.  Michiganders must keep the pressure on Snyder the entire time.

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