Something to Remember in the Coming Arguments About the (Potential) Detroit Bankruptcy

If the Detroit bankruptcy is allowed to proceed (last I saw, a judge halted it because it violated the Michigan state constitution), you’ll hear a lot about how Michigan’s retirees will have to give up large chunks of their pensions. Never mind the indecency of a retroactive pay cut targeting elderly people, there’s a slight technical problem with that approach:

One part of this story that is striking is the discussion in the media of how workers’ pensions will fare in bankruptcy. Most articles seem to take it for granted that pensions will face large cuts, with some implying that retired workers may be in the same situation as unsecured creditors, getting just a few cents for each dollar owed.

This is striking because Michigan’s state constitution seems to say as clearly as possible that pension payments are a contractual obligation of the state. Article IX, Section 24 states:

“The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.”

That language would seem to put pensions ahead of bondholders in claims on the city’s income and assets. That would mean that bondholders would only get any money if pension claims have been honored in full.

If that seems unfair to bondholders, remember that this provision in the constitution dates back to 1963. Anyone who lent Detroit money in the subsequent five decades presumably could have read the constitution and recognized that they would be behind retired workers in claims on the city’s assets in the event of a bankruptcy.

If they lent the city money knowing that pensions would have priority, then they have nothing to complain about. If bondholders didn’t know that pensions would have priority then they should do more homework before investing their money in the future.

Somehow I think this will be conveniently forgotten…

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1 Response to Something to Remember in the Coming Arguments About the (Potential) Detroit Bankruptcy

  1. Cathy W says:

    Prediction of the prevailing counter-argument: “Well the city promised pensions it couldn’t afford because Union Thugs. We can’t honestly expect those promises to be honored.”

    I was one of those union thugs with the city of Detroit for negotiating my union’s 2004 contract. The idea that we had any power in the situation was laughable. (I’m personally lucky – I’ve only been there 12 years. If I still have a job after the “reimagining” of the water department – and one theory I’ve heard from more than one person is that that’s a ploy to set the remaining city workers up to fail and then privatize the rest of the work – I’ll still have at least 18 years to set myself up for a less comfortable retirement than I might have liked. The vast rush of people out the door in the past few months and the folks who’d intended to retire in the next couple years might be in trouble.)

    I’d also like to know what happened to the idea that all financial investments are inherently risky, and that’s why they pay interest, and why more risky investments pay more interest and your FDIC-insured savings account pays practically none. The court should be able to point that out to any bondholder who insists that they get paid in full, which was my biggest source of shaking-my-fist-at-the-universe-in-rage during the bank bailouts…

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