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Ear to the Ground

Broken Promise: Bankruptcy Judge Says Detroit Can Cut Pension Payments

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Posted on Dec 4, 2013
Ann Millspaugh (CC BY-SA 2.0)

A photograph of Midtown Detroit.

A federal bankruptcy judge ruled Tuesday that the city of Detroit was eligible to reorganize its debts through legal bankruptcy, and agreed that it could renege on pension payments for its retirees—even though they did nothing to force the city to this crisis point.

And today it’s Detroit. Tomorrow, maybe Chicago or Los Angeles? From The New York Times:

The judge, Steven W. Rhodes, dealt a major blow to the widely held belief that state laws preserve public pensions, and his ruling is likely to resonate in Chicago, Los Angeles, Philadelphia and many other American cities where the rising cost of pensions has been crowding out spending for public schools, police departments and other services.

The judge made it clear that public employee pensions were not protected in a federal Chapter 9 bankruptcy, even though the Michigan Constitution expressly protects them. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said.

James E. Spiotto, a lawyer with the firm Chapman & Cutler in Chicago who specializes in municipal bankruptcy and was not involved in the case, said: “No bankruptcy court had ruled that before. It will be instructive.”

Instructive indeed. What that means is someone can work an entire career for a municipality, following the rules, often at lower wages than in the private sector as part of a trade-off for a stable pension in retirement. Until now. Suddenly, retired workers have to stand in the same line as bondholders, the folks who invested in the city’s bonds knowing they were encountering risk. And contrary to the right-wing narrative, the retirees aren’t well-heeled folks living off the fat of the taxpayers. The average annual Detroit retiree pension is around $19,000, and as I wrote earlier this year for The Washington Post:

“Those who blame pensions confuse cause and effect—like blaming a personal bankruptcy on a pesky car loan after one’s salary was cut in half. The difference, of course, is that getting rid of a car you can no longer afford isn’t the same as reneging on a promise to 21,000 retirees.

Pensions chew up so much of Detroit’s budget because policymakers didn’t prioritize meeting pension obligations when times were flush, as the Detroit Free Press pointed out before the bankruptcy filing. “Decades of mismanagement and bad practices, coupled with catastrophic market declines, have altered the pensions from a reliable way to assure retirees’ futures into a massive financial burden,” the paper noted in an editorial, adding that Detroit retirees get about $1,600 a month. Slashing those benefits now would exacerbate the city’s problems, since many retired city workers still live there.

And, although Detroit has had its share of scandals and political corruption—former mayor Kwame Kilpatrick faces a lengthy prison sentence after his conviction this year for bribery and extortion—those didn’t cause its financial problems, either. The city’s decline was born of a half-century of corporate decisions to decentralize production, a lack of industrial and economic diversity, regional policies that encouraged exurban expansion, racial friction and globalization.

The bankruptcy judge now says further impoverishing retired workers is fair play, and a fair solution for Detroit’s vast problems. No, it isn’t.

—Posted by Scott Martelle.



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