CA take note: MI state judge tests federal bankruptcy law

For municipal bankruptcy, all eyes across the nation now turn to Detroit.

The latest: Michigan Circuit Court Judge Rosemary Aquilina ordered Detroit’s bankruptcy filings be withdrawn because they violate state law guaranteeing that pensions must be paid to public employees. The bankruptcy filing seeks to reduce all city liabilities, including pensions, by 90 percent.

Reported the Detroit News:

” ‘It’s absolutely needed,’ said Judge Rosemary Aquilina, observing she hopes Gov. Rick Snyder ‘reads certain sections of the [Michigan] constitution and reconsiders his actions.’….

“ ‘It’s cheating, sir, and it’s cheating good people who work,’ the judge told assistant state Attorney General Brian Devlin. ‘It’s also not honoring the president, who took [Detroit’s auto companies] out of bankruptcy.’”

She gets wrong what happened. Federal bankruptcy court would have dealt with the Chrysler and GM bankruptcies. But President Obama and the Democratic-controlled U.S. Congress stepped in and passed bailout legislation. The two auto giants were declared “too big to fail.”

By contrast, every year a few cities across the country declare bankruptcy. Detroit’s is the biggest city bankruptcy so far because its population now is around 700,000. But not that far behind are bankrupt San Bernardino at 213,000 and Stockton at 296,000. Combined, the two California cities have 508,000 people.

Obama

If Obama intervened in Detroit, he would have to intervene across the country, setting a new precedent of the federal government bailing out cities. And if that happened, you would see dozens, maybe hundreds, of cities declaring bankruptcy as a way to get federal funds. Thousands of cities everywhere, even financially sound ones, would become even more fiscally reckless, especially on pensions, assuming that, no matter what happened, the feds would bail them out.

Such bailouts soon would amount to hundreds of billions of dollars, goosing the already immense federal debt of $16.7 trillion.

And even if the president wanted to blow billions on municipal bailouts, the U.S. House of Representatives now is controlled by Republicans who wouldn’t cooperate. As a start, they wouldn’t bail out a city that voted 98 percent Democratic in the last election. And Republicans also wouldn’t want to bail out workers whose unions continually attack Republicans, while manipulating the system to push public employee pay and benefits to unsustainable levels.

As to the GM bailout, the latest estimate was that its final cost to taxpayers will be $25 billion. Just letting the normal bankruptcy proceedings go forward would have saved that money, while still reorganizing the company, albeit on terms not as favorable to the UAW and Democratic political ambitions.

Gov. Snyder’s office is appealing Aquilina’s decision and no doubt will prevail in the state’s own circuit court, which understands federal precedence in bankruptcy cases. Even if it loses there, the bankruptcy court will decide the case.

For California, this new Detroit drama will confirm that federal bankruptcy courts can set aside state constitutional protections on pensions.