Public Pensions On The Chopping Block

Yesterday, a judge ruled that Detroit is allowed to go through bankruptcy. And it looks like it will be painful for The Motor City’s pensioners:

In his ruling, [Judge Stephen] Rhodes turned away arguments that the bankruptcy violated the federal constitution. The use of federal mechanisms for resolving municipal debts does not violate the tenth amendment, he said, citing the Supreme Court case of US v Bekins. Then he turned to the state constitution, which protects the pensions of public workers, except in the case of bankruptcy. Mr Rhodes ruled that those constitutional protections “do not apply to the federal bankruptcy court” and that pensions ought to be treated like the city’s other debts.

Scott Shackford praises the judge’s decision to allow pension cuts:

Rhodes’ comments on pension cuts may well prove to be extremely important not just for Detroit, but for any city currently in bankruptcy or considering bankruptcy. Chad Livengood of The Detroit News tweeted quotes from the judge as he delivered the ruling. The judge said that pensions are no different from other contracts under federal bankruptcy laws and “not entitled to any heightened protection in bankruptcy.” That’s a big deal. Pension protectors have been trying to argue that public employee pension benefits can’t be cut back and are protected by state laws or within state constitutions. Federal bankruptcy courts don’t have to care. Cities like Stockton and Vallejo, Calif., have resisted trying to change their pension plans even while in bankruptcy. Maybe this ruling will give city leaders the political courage to address one of their biggest sources of budget debt.

David Cay Johnston worries about the precedent:

Norman Stein, a Drexel University law professor who is an expert on pensions, said that if the Detroit order stands it will become standard practice to slash benefits. “It would be a human catastrophe of the first order if pensions of vulnerable older workers can be cut whenever a local government goes to bankruptcy court,” Stein said. “We will be consigning firemen and policemen, who did nothing wrong other than protecting the city and depending on the city’s promise, into old-age poverty.”

Heather Long is more sanguine:

In coming months (the tentative deadline is now 1 March), Detroit’s emergency management team has to present a workout plan to the judge. Creditors will have plenty of opportunities to object to the plan, and the judge will likely ask for revisions along the way. At the end of the day, the judge will decide whether to accept it based on one key criteria spelled out in the bankruptcy law:

The plan is in the best interests of creditors and is feasible.

That’s a huge protection for creditors, which include the city workers and retirees. The judge isn’t going to accept any old plan from the city. As Judge Rhodes has already stated, he is sympathetic to the needs of city residents and retirees. The proclamations that pensions will go from an average of $19,000 a year to about $3,000 are PR scare tactics. Deep cuts – or anything close – aren’t going to meet the legal test that the plan is in the “best interests of creditors”. It’s possible pensions won’t be cut at all.

Kevin Roose weighs in:

Whether or not the Detroit pension cuts end up happening — and it’s likely that they will, in some form and amount — today’s decision represents a major development for the entire country. Four cities in California, for example, are currently wrapped up in negotiations about whether they can cut pensions as part of their bankruptcy petitions. These other efforts to shed debt by cutting pensions might ultimately fail, or be overturned by the Supreme Court. But now that hosing pensioners is possible in Detroit, there’s not much to stop other cities from trying to do the same thing when they run into trouble.

McArdle sympathizes with the retirees but sees no alternative:

This is terrible for the pensioners, who are likely to see their checks cut back quite a lot. But it’s hard to see what else could have happened. Detroit can’t pay its debts and keep the city running. There is no more tax revenue for the city to take; the citizens are poor, and the commercial base is the sort of low-margin retail and dining that cater to a very poor population, plus a few corporate headquarters bobbing in a sea of beautiful, empty Art Deco office buildings.