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Tuesday, December 3, 2013

Judge paves the way for Detroit's bankruptcy

Detroit will go bankrupt. Federal Bankruptcy Judge Steven Rhodes ruled that the city is insolvent and entitled to seek protection under Chapter 9 of the bankruptcy code. He dismissed arguments from the city's public unions that somehow the law did not apply to the Motor City. Municipal unions have argued that pension benefits, although they are the direct cause of the insolvency, should be immune to cuts.
“The city needs help,” said Rhodes. Detroit is facing "mounting crime rates, spreading blight and a deteriorating quality of life. The city no longer has the resources to provide its residents with basic police, fire and services."
If anything that is an understatement. About half the city's street lights are no longer burned in an attempt to save cash. The unions promised to appeal the decision. Well, of course they will but that's probably little more than a formality. Although New York and Pittsburgh have been to the brink Detroit will be the first major city to go belly up. The legal precedent should be a wake up call for a few dozen other large cities that find themselves strapped with unfunded pension liabilities.
Vincent Vernuccio, a pension expert with the Mackinac Center, said Rhodes’ ruling could prove a bellwether decision, as cities and states, such as Illinois, work to address multi-trillion dollar pension deficits.
“The judge is sending a message that it’s a myth that defined benefit plans provide guaranteed income with no risk and that nothing can be done to affect them,” he said. “This is going to send shockwaves throughout cities teetering on the brink.”

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