Today is the first day of the end of the world…
…well, it is if you’re a unionized public employee.
The city of Detroit today officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy after U.S. Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria required to receive protection from its creditors.
The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities that have hampered Detroit from attacking pervasive blight and violent crime.
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Rhodes — in a surprise decision this morning — also said he’ll allow pension cuts in Detroit’s bankruptcy.
To put this in perspective, the union pensioners, under City Manager Keven Orr’s plan, were scheduled to get $0.18 on the dollar. If you’re a Detroit pensioner and you’re check has been $1,000 per month, it’ll be $180 shortly.
It’s important to note that a plan has not yet been approved by Rhodes and he’s clear that he expects the pension cuts to be “fair”. Again, in perspective, Detroit is $18 billion in the hole and can’t make the city payroll without help from the state let alone pay their bills. Fairness is going to be a sharp sword on all sides.
The expectation is that Orr will have the first draft of a plan before the judge this month.
You can expect that no matter how the judge rules there will lawsuits from all directions, they’ve already started, and at least one of them will likely make the Supreme Court docket.
Almost immediately afterward, Michigan Council 25 of AFSCME, the city’s largest employee union, filed an appeal to the U.S. District Court for the Eastern District of Michigan. The union also plans to ask Rhodes to allow the case to be sent directly to the 6th Circuit Court of Appeals to expedite the case.
The courts are very reluctant to overturn a bankruptcy judge on matters of fact, and that’s what we’re down to. The unions are frothing because the Michigan State Constitution supposedly protects state/municipal pensions. Their problem is that federal bankruptcy law overrules state law and state constitutions.
I expect the judge to be upheld down the line when all the dust settles. Certainly the final settlement will look dramatically different from what’s on the table today, but without doubt the union’s pension/retirement/healthcare arguments are going to be ground up to dust and that will send a very loud signal to every city, county, and state government and a screeching signal to the unions that represent public employees.
Cities, counties, and states are currently about $1 trillion underwater in terms of funding public employees’ pension funds. You can expect the scrambling to begin. Especially at CalPERS…
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