Federal Judge: Detroit Can Declare Bankruptcy, Pensions Up For Grabs

Municipal bonds are supposedly safe because the city promises to squeeze taxpayers as much as possible to pay on the bonds.

Not anymore.

At one time one could expect great pension benefits if you belonged to a public union.

No longer.

(Reuters) – Detroit is eligible for the biggest municipal bankruptcy in U.S. history because the city is broke and negotiations with its thousands of creditors were unfeasible, a federal judge said on Tuesday in a wide-ranging ruling that also said the city could cut retiree pensions.

The ruling by U.S. Judge Steven Rhodes marks a watershed in the history of Detroit, once the cradle of the U.S. auto industry and now a symbol of urban decay and mismanagement.

Detroit’s state-appointed emergency manager, Kevyn Orr, had painted bankruptcy as Detroit’s best bet for a return to financial stability, and Rhodes’ ruling will now give Orr and other civic leaders an opportunity to test that argument.

“It is indeed a momentous day,” Rhodes said as he read aloud for more than an hour from a written statement in a packed courtroom. “We have here a judicial finding that this once-proud and prosperous city cannot pay its debts. It’s insolvent. It’s eligible for bankruptcy. At the same time it has an opportunity for a fresh start.”

Detroit’s labor unions, retirees and pension funds, all of which likely will bear the brunt of austerity measures Orr plans to impose, had argued against the city’s bankruptcy in a nine-day eligibility trial. Orr has said he plans to impose a restructuring plan by the end of the year.

Rhodes also said that the city could cut pensions as part of the restructuring, despite the argument that Michigan’s constitution protects them from being slashed. However, Rhodes warned he will not rubber-stamp any pension cuts.

“Nobody should interpret this holding, that pension rights are contract rights, to mean that this court will necessarily confirm any plan of adjustment to impair pensions. It will not casually or lightly exercise the power under federal bankruptcy law to impair pensions,” Rhodes said.

Bondholders are also going to get a “haircut.”

Unions are going to have to learn that cities cannot be exploited forever. Eventually raising taxes will just force people to move away. Those pensions will never get paid. Cities are going to have to treat their employees as employees who are hired to do a job, not a voting bloc who can be bribed with pension promises. Detroit is only the beginning.

Remember, all public debt is immoral.