Breaking News: Detroit Can Declare Bankruptcy

December 3rd, 2013 at 3:23 pm

So ruled the judge, paving the way for the largest municipal bankruptcy in our nation’s history.  Detroit’s liabilities are estimated at $18 billion with a ‘b.’  The next largest city bankruptcy was San Bernardino, CA, in 2012 with a debt level of $46 million…with an ‘m.’

Another important part of the judge’s ruling was whether state or federal law would prevail regarding whether the city’s pension debt ($3.5 billion of the total) could be discharged.  Michigan state law says no; federal law says yes.

The judge went federal.  Pension holders will try to contest that finding on appeal, but with the caveat that a) I’m no bankruptcy lawyer, and b) a default of this magnitude is unprecedented, I suspect this part of the ruling will stand.

From the beginning, the city looked insolvent, so this strikes me as the correct ruling.  It is a necessary part of any plan to give Detroit a chance to consolidate and start with a clean slate, at least in terms of its financial liabilities.  But there a lots of ways in which this city and the people in it are a special case, and these things must be considered during the restructuring.

Its poverty rate, 2007-11, was 36%, more than twice that of the nation’s 14% over that period;

Its median family income was about $28K, compared to $53K for the nation.

The average pension for general city workers is under $20K, and remember, some city and state workers do not participate in Social Security (note: an earlier version of this post left out the word “some”; h/t: KR).  Cops and firefighters get larger pensions, but nothing off the charts (the average for police is $30K).

Given all that, one is glad to read this:

…while the judge said pensions could not be treated differently from other unsecured debt, he said the court would be careful before approving any cuts in monthly payments to retirees. “It will not lightly or casually exercise the power to impair pensions,” he said.

Noble sentiments.  But it will require close watching to see if they’re adhered to.


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2 comments in reply to "Breaking News: Detroit Can Declare Bankruptcy"

  1. wendy beck says:

    The least Congress can do (for a Congress that does little or nothing) is to repeal the WEP (Windfall Elimination Provision). While it’s true that many city and state workers do not pay into social security (true in California, where I live), this unfair law actually docks social security payments of people who worked in other jobs and paid into social security. So second-career teachers and others who have tried to cobble together a retirement will be denied social security for times when they did pay in.

    When Congress has many members who truly make a “windfall” by going through the revolving doors into businesses and lobbying, most of the workers the WEP affects have very little to rely on. Now they have even less.

  2. save_the_rustbelt says:

    The State of Michigan did not impair or cut pension benefits.

    The plans are in danger because of the racketeering thugs who controlled Detroit for decades, compounded by economic woes driven by crime, poor services, high taxes and dum-dum management at the Big 3.

    Tragic? Yes. Foreseeable? By many of us, yes.

    I won’t mention which political party has dominated Detroit and Wayne County since the early 60s, but you already know.