Today a US district court will consider whether Detroit is eligible for chapter 9 bankruptcy protection. If it goes forward, Detroit’s would be the largest municipal bankruptcy in US history.
Unions argue that the public-sector pensions are protected under Michigan’s constitution. The issue could eventually go all the way to the Supreme Court.
The laws regarding municipal bankruptcy vary from state to state. So, as one expert put it, “you can’t compare apples to apples.”
Still, examples of other cities that went bust underscore the challenge for any judge trying to weigh the financial obligations to retirees with the need to keep a city solvent.
Consider the city of Central Falls, Rhode Island. When it declared bankruptcy in 2011, a judge -- acting as receiver for the city – slashed some retiree pensions by half.
Frank Shafroth directs the Center for State and Local Government Leadership at George Mason University.
He spoke with the judge overseeing the Central Falls bankruptcy, who described the experience as the hardest decision of his life. The judge worried that retirees wouldn’t have enough to live on, but protecting basic services had to come first.
“He said, ‘Listen, if someone dials 911 because their house is one fire and the children are on the third floor, [a] retiree doesn’t answer,’” says Shafroth. “Your first responsibility as a receiver in a bankruptcy is to make sure that firemen, and fire trucks, and police officers are available in the event of an emergency that’s critical to saving lives.”
Finding the correct balance will be a challenge for cities like Detroit and San Bernardino, California, which both want bankruptcy protections.
If the cities protect pensions but reduce their current workforces, they cut the amount of money going into funds that ultimately support retiree pensions.
“If the municipality doesn’t develop a recovery plan that will stimulate the economy to create new jobs, then there really isn’t much of a future,” says attorney and municipal bankruptcy specialist James Spiotto.
Companies in the private sector pay into an insurance fund overseen by the Pension Benefit Guarantee Corporation that’s meant to protect retiree benefits.
“That’s been viewed in the private sector as a necessary social benefit. And likewise, it should be viewed in the public sector the same way,” says Spiotto. “So that everyone has a safety net. And that no one fears – which is what you really hear from retirees – that I’ll be left with nothing.”
He suggests that cities try to make any cuts to pension benefits only temporary. So if a city’s finances recover down the road, retirees can get some of their benefits back.