Opinion: Detroit bankruptcy ruling good for retirees, but city has long way to go

Federal bankruptcy Judge Steven Rhodes’ approval Friday afternoon of the city of Detroit’s municipal bankruptcy plan will be parsed, debated, scorned and lauded over the next few days (Next Chapter Detroit live blogged from the courtroom). But one key aspect bears embracing: The ruling embraces the idea that city employees and retirees are owed different debts than bondholders and other creditors.

The plan, allowing the city to emerge from bankruptcy after 16 months, is complex and involves simultaneously setting aside $1.7 billion for investments while sloughing off pieces of city-owned real estate to satisfy creditors. The plan lets the city trim $7 billion from its $18 billion debt, but also smartly sets the stage for further tax-generating private development – something Detroit sorely needs even with turnarounds in the downtown and midtown sections.

But the human dimension of the plan stands out. Under rulings both in the Detroit case and more recently in Stockton, federal judges have said that pension commitments are just another debt in municipal bankruptcy cases, regardless of what labor contracts or state laws might say. Against that legal backdrop, Detroit bankruptcy negotiators carved out a “Grand Bargain” with donations from nonprofit organizations to limit the pension cuts to around 4% for civilians, a reduction the retirees agreed to by vote (to reject the cut invited deeper reductions). Other deals quieted creditors who felt the retirees should bear more of the burden.

Granted, this is less a legal argument than a moral one, but it’s good that the retirees suffer relatively light pain compared with the bondholders and other creditors. Because their relationship with the city is much different, something Rhodes seemed to understand when he said preserving Detroit’s pensions is ”necessary to its mission” as a city. Rhodes also said a state initiative protecting pensions means they are “entitled to substantial deference”; despite his ruling they are legally on equal footing with other creditors.

Key, to me, is the retirees are people who took jobs under conditions that promised them paychecks and health coverage while they worked, and an income in retirement. And despite some questionable deals, it’s not much. The average is less than $20,000 a year for civilians; police and fire retirees have a higher pension. These are employees who’ve done the work, and to take away pension payments at this stage is tantamount to a retroactive wage cut. No one enters into a pension plan with the understanding that it might go away.

Bondholders and other creditors, though, are aware (or at least they should be) of the risk of not getting paid when they buy bonds, engage in contracts, etc. In fact, bondholders get a relative premium based on the likelihood of default – the higher the risk, the higher their investment return. It’s not good, of course, that their investments turned sour, as did bills owed to vendors, but that’s part of the inherent risk of being in business. Sometimes businesses – and, rarely, municipalities – fail.

On another front, Rhodes’ approval of the Grand Bargain saves one of the nation’s best, under-appreciated art collections held by the Detroit Institute of Arts. Efforts by creditors to liquidate some of the museum’s holdings dried up with the Grand Bargain, which more fully separates the museum from the city (it was unclear the art could have been sold anyway). Rhodes, who noted that the art was never offered as collateral, also embraced the notion of art as an inextricable part of a city’s cultural life.

“Every great city in the world actively pursues these values. These are the values Detroit must pursue to uplift, inspire and enrich its residents and its visitors,” Rhode said, according to tweets and other reports form the courtroom. “To sell the DIA art would forfeit the city’s future. The city made the right decision.”

Now let’s see what the city can do to continue righting itself. As I’ve written before, the city government’s financial collapse was caused by the general de-industrialization and de-urbanization of the 140-square-mile city, which has shrunk from a population of 1.84 million in 1950 to under 700,000.

The recent investments in downtown buildings and in the midtown area, anchored by Wayne State University and a passel of medical centers, is a great first step – particularly the increase in people choosing to live in those areas. But until the revival begins spreading to – and lifting up – those living in deep poverty and joblessness in much of the rest of the city, Detroit’s turnaround will be more promise than delivery.

Follow Scott Martelle on Twitter @smartelle.