By Brian Albert
After a long decline, Detroit stooped to a new low on Thursday. The failing city filed for Chapter 9 bankruptcy protection in federal court. It’s the largest municipal bankruptcy in U.S. history, coming after decades of growing debt and a shrinking population.
From USA Today:
The filing begins a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities.
Much of that $18.5 billion in debt are obligations owed to current and former city employees through pensions. THELAW.TV spoke with attorney Carl Singley of Franklin Mediation about the options available to municipal workers when their city goes bankrupt. Singley is a former Dean of Temple University Beasley School of Law and an expert in municipal bankruptcies.
What happens if you work for the city of Detroit? According to Singley, “Not a whole lot.” Singley calls this uncharted territory: “Once it is filed, they have absolutely no control of the outcome. I think these matters will go ultimately up to the United States Supreme Court. My guess is that the Supreme Court will probably conclude that if you want to use the protection of the Federal Bankruptcy Court, then you have to treat all unsecured creditors the same, which is to say that the pension laws that give municipal employees sort of a sacrosanct position, I can’t imagine that that would stand if it’s quite clear that the Federal Bankruptcy applies for all creditors. … The short answer after all of this is I don’t know that there’s a whole lot that one can do once the filing has taken place, to protect their pensions. It’s a crap shoot.”
And it’s not just pensions that will be affected. Many current city workers could lose their jobs. ”The problem is municipalities are faced with a couple of really unfortunate choices,” says Singley. “They may have to lay off employees because 25% to 30% of a lot of budgets go to funding pension and benefit plans for public employees. One of the unfortunate choices would be to cut the service levels by laying off employees, which are likely to be policemen and firemen. The second unpleasant option that cities face would be raising taxes.”
The effect of this bankruptcy is that people may lose trust in public pension funds, especially in historically troubled cities like Detroit. “The people who really are going to take the biggest hit in all of this are relatively new public employees,” says Singley. He says pension reforms are inevitable. “Employees are going to have to increase their contributions. The level of benefits that are guaranteed after retirement have to be pared back. All of that’s going to change and the employees who are going to be impacted the most are people who are just now coming into the system. They won’t see the kind of lucrative benefits their predecessors enjoyed. Now, should they trust them? The fact of the matter is that the answer probably is there is no guarantee for public employees in terms of what your expectation is. I think they have to be realistic given the underfunded nature of most of the major pension funds, state and local, around the country. There’s got to be dramatic change in terms of how these programs are funded and the expectations that people who participate in these programs have about what’s likely to happen when they retire.”