A wake-up call from Detroit
A judge’s ruling Tuesday that the city of Detroit’s bankruptcy case may go forward — and that its pension obligations are not entitled to special protection but can be reduced, along with other debts — sends a chilly message to workers in California, where Stockton and San Bernardino are moving through the Chapter 9 bankruptcy process and other cities are struggling with their costs and revenues.
The decision makes it clear, if it wasn’t previously, that the promise of full retirement pay for municipal employees is directly dependent on the continuing solvency and sound financial planning and management of cities.
In theory, that dependence should give police officers, firefighters, sanitation workers, clerks and other employees on public payrolls in solvent cities even more incentive than they have already to be the municipal budget’s best fiscal watchdogs. That means entering into pay and benefit agreements that are not merely lucrative for workers but sustainable for the cities in bad financial times as well as good.
Workers and retirees in Detroit can argue, correctly, that they aren’t to blame for the years of economic decline, the shrinking of the tax base or the poor decisions made by their elected employers. And they can argue, again correctly, that a city’s moral duty to make good on retirement pay, which is in a large sense deferred wages owed for work already performed, should outweigh the obligation to fully pay bondholders, who generally offset investment risks against one another and insure against loss.
But in the end the moral argument may make little difference. There simply isn’t enough money, or any prospect of it, for Detroit to fully meet its debt to retirees, let alone to all of the other creditors as well. Judge Steven W. Rhodes made it clear that he won’t allow the city to eliminate pension payments altogether. But he also ruled that under the Michigan Constitution, retiree pensions are contracts, to be considered along with other contracts, debts and obligations with which the city can only partially comply.
Because the authority for the decision is state-specific, it’s not clear whether federal bankruptcy law would trump California’s Constitution on the question of the inviolability of public pension obligations here, but the two states’ situations appear sufficiently similar to give cities a stronger hand when pressing public employee unions to make concessions. After all, they might argue, if you don’t reduce our obligations to future retirees now, we may line up at the courthouse door to get them thrown out for current retirees.
A cure for the common opinion
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