Will Detroit Once More Lead The Way?

At one time in American history Detroit was a leader in commerce, capitalism, and civic development.  As the home of the American auto industry, Detroit experienced the boom.  More recently, Detroit has experienced the bust.  Now the question is whether Detroit will become a leader in a different way — by showing how local governments can use the federal bankruptcy laws to try to free themselves from the product of decades of financial mismanagement and shortsightedness.

IMG_5164Yesterday, federal bankruptcy judge Steven Rhodes ruled that Detroit’s pension obligations are not immune from scrutiny in a federal bankruptcy proceeding, notwithstanding a Michigan constitutional provision that specifically protects public employee pensions.  In effect, the judge said, contractual obligations that require cities to pay public pensions are like any other contracts and thus may be modified and restructured by a bankruptcy judge after all sides present evidence and argument.  It is the first clear ruling on this issue — one that is of enormous interest to other local and state governments that are dealing with the fiscal consequences of overly generous public employee benefit and pension arrangements that were reached when times were flush but that now threaten to crush the governments’ ability to provide basic services to citizens.

The bankruptcy judge’s ruling will be appealed, and the judge also has promised to be careful and thoughtful before changing any monthly pension payments.  Neither of those circumstances may provide much comfort to former Detroit employees who have retired in reliance on their monthly pension payment from the city and who now must wonder how they personally will be affected.  At the same time, Detroit’s financial challenges are so staggering that city administrators have few options.  The bankruptcy process will work for Detroit only if the city emerges from the bankruptcy with a balanced budget and financial obligations that it can realistically carry given its current, shrunken state — and employee and retiree benefit programs have to be considered as part of that process.

When we visited Detroit earlier this year we stopped to look at a famous downtown statue called the Spirit of Detroit, of a seated man holding the sun in one hand and a family in the other, with a quote from the Bible about liberty behind him.  Viewed in the context of Detroit’s current, crippling financial problems, the figure looks like he is trying to decide which way to turn.  A bankruptcy judge will now help him make that decision.

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