Detroit’s Bankrupt, Pensioners Beware

The once mighty city of Detroit has been brought to its knees in the largest municipal bankruptcy in US history. After decades of mismanagement and taxpayer flight, the city decided to call it quits and file for bankruptcy protection earlier this year. In a gesture of cooperativeness and solidarity that has characterized their conduct for many decades, the representatives of Detroit’s public employees’ unions have filed a lawsuit to prevent pension liabilities from being subject to restructuring during bankruptcy. Arguing that pension obligations are sacrosanct and should not be subject to restructuring, the unions that  helped bankrupt the city are now preventing it from regaining solvency.

Luckily, in a surprise move earlier this week, Judge Steven Rhodes ruled that pensions could be cut in a restructuring. While the lawyers for the unions appealed the decision within minutes of the ruling, Judge Steven’s decision should be a wake-up call to cities and unions across the nation. Cities need to address their unfunded obligations now or risk the possibility of deep cuts later.

The restructuring of Detroit’s debts will go on for another year, and the litigation surrounding pension liabilities is likely to go all the way to the Supreme Court, but it is now clear that the rules of the game for pension obligations have changed.

Detroit’s is the largest municipal bankruptcy in US history, and it will be closely watched by other cities currently facing their own financial distress. If Detroit manages to use the bankruptcy process to reduce its pension obligations and cut its debts, taxpayers should rejoice as more of their money will go towards paying for services instead of servicing past promises.

Should the restructuring succeed in reducing spending, debt and taxes, money may once again walk back to Detroit, instead of fleeing as it has for decades.