CA take note: Detroit bankruptcy could slash pensions 90%

July 18, 2013

By John Seiler

Detroit declared bankruptcy today. For California, here are the takeaways from the Detroit News report:

“A bankruptcy judge could trump the state constitution by slashing retiree pensions, ripping up contracts and paying creditors roughly a dime on the dollar for unsecured claims worth $11.45 billion.”

That’s because the bankruptcy will be heard in a federal bankruptcy court. The California Constitution has similar clauses. California’s pension funds insist that, no matter what, the pensions are sacrosanct; that state law trumps federal bankruptcy law. The Detroit bankruptcy could provide an answer.

Emergency Manager Kevyn Orr…

“proposed paying most of the money owed to secured creditors while pension funds, unions and unsecured bondholders would receive, in some cases, 10 cents on the dollar.”

That’s right: 10 percent. Which means the funds themselves effectively would become insolvent, and pensioners would not get paid.

As I’ve written before, about 30 years ago the same thing happened to Detroit’s neighboring city of Highland Park. Bankruptcy led to the pensions being entirely canceled. When there’s no money, there’s no money.

“The bankruptcy filing comes as an Ingham County judge is preparing Monday to hear arguments from retirees seeking to stop the bankruptcy filing, which produced an automatic stay of all pending litigation and capped a month of intense talks between Orr’s team and creditors, which largely have failed to restructure as much as $20 billion in debt and long-term liabilities.

“News of an imminent filing prompted lawyers for the city’s pension funds to request an emergency hearing this afternoon in Ingham County Circuit Court to block a bankruptcy authorization.”

It’s hard to see how a state court could trump a federal bankruptcy court. Federal bankruptcy law is long established and is one of the few parts of the federal government that actually works fairly well.

“Instead of paying creditors in full, Orr would use $1.25 billion over the next decade to buy police cars and fire trucks, replace broken street lights, tear down burned-out homes, fight blight and improve city services.”

That’s the question: Pensions or services?

Corollary question: If there are no services, why even have a city government — or a state government?