U.S. Bankruptcy Judge Steven Rhodes ruled Tuesday that Detroit is indeed bankrupt and can proceed with its Chapter 9 filing. The facts in the case gave him no grounds on which to rule otherwise: The Motor City has an estimated $18 billion in debt and cannot reliably provide even basic services to its residents. Rhodes might as well have declared that the earth was round and the sun rises in the east.
Nevertheless, the lead-up to the decision was fairly suspenseful given that it involved a significant legal precedent: whether federal law has supremacy over state law in bankruptcy matters. The Michigan constitution includes a provision that explicitly forbids trimming state and local government employee pension benefits, as the city is seeking to do under bankruptcy. Most legal experts believed that federal law trumped state law but the issue had been untested in court.
Nobody involved wants to cut benefits. They just have no choice. The pension recipients are going to have to accept less than they were promised, just like the city’s bondholders. Nevertheless, unions representing the city workers took the position that not one cent could legally be touched. Had Rhodes accepted their argument, it would have crippled Detroit’s ability to restructure its debt and given Big Labor a powerful legal tool to frustrate similar efforts in other debt-ridden cities and states.
That’s significant because, while Detroit may be in a uniquely bad situation, it is hardly alone when it comes to drastically underfunded public employee pension programs. The investor research firm Morningstar reported in September that only 12 states had funded at least 80 percent of their pension obligations, the level at which a plan is generally deemed to be sound. A January report by the Pew Charitable Trusts found that 61 cities — the largest ones in each state plus all others with more than 500,000 residents — collectively had covered only 74 percent of their obligations. That’s a shortfall of $217 billion.
Thankfully, bankruptcy may not be necessary in most cases. But, assuming Rhodes' ruling withstands the inevitable appeals, the option will be there for the worst-off and the unions will not be able to use an obscure provision of local law to block it in court. That’s good news for the nation’s long-term fiscal stability.
Public employee unions have predictably attacked the ruling. American Federation of Teachers President Randi Weingarten called it “very troubling morally.” American Federation of State, County and Municipal Employees President Lee Saunders called it “dead-ass wrong and morally corrupt.”
It is undeniably a rotten situation for Detroit city workers — who do have a right to be angry — but that doesn't change the fact that the money just isn’t there. Those workers should direct their anger toward asking some pointed questions to the elected officials and union leaders who made the pension promises in the first place and then neglected to fund them.