Detroit Goes Down
Detroit's bankruptcy filing has been more dramatic than most. Usually you trundle sadly down to the courthouse, staggering under the weight of the paper you're giving the court, a clerk takes your paperwork, and the wheels grind slowly through the process of fairly dividing up your assets and payments among your various creditors. But in Detroit's case, the unions have been trying to stop the process, apparently in the hope that if Detroit can't declare bankruptcy, someone else will have to step in and pay their pensions. They went to court this past summer to block the bankruptcy, only to be foiled when the city came into court and said it had just filed a few minutes before ... and were themselves in turn foiled by Circuit Court Judge Rosemary Aquilina, who threw the case back out and delivered an amazing speech:
"It's cheating, sir, and it's cheating good people who work," the judge told assistant Attorney General Brian Devlin. "It's also not honoring the (United States) president, who took (Detroit's auto companies) out of bankruptcy."
Aquilina said she would make sure President Obama got a copy of her order.
"I know he's watching this," she said, predicting the president ultimately will have to take action to make sure existing pension commitments are honored.
The drama is now at an end: A federal judge just ruled that Detroit can indeed declare bankruptcy, shedding some of its unsustainable pension obligations. This will be the largest public bankruptcy in history.
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.
Blessedly, the pensioners will not lose everything; the funds still have some money. And the bankruptcy court does have discretion in how the losses are allocated between unsecured creditors (which is what Detroit's pension fund now is for the estimated $3.5 billion by which it is underfunded). The court is unlikely to just stiff the other creditors in order to pay the pension, but you can expect it to make sure some assets are left in there. It may also look to claw back some of the extra payments that were made to current retirees in prior years.
But people who were counting on a comfortable retirement are now going to be counting every penny that goes out. When cities die, they take a lot of innocent people with them.
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Megan McArdle at email@example.com