Detroit Eligible for Bankruptcy Protection – Public Pension Shockwave
Promised by elected politicians and city leaders on the stability of their pensions over decades, public employees across the United States may be in for a surprise. The big news in Pensionland is that on December 3rd, Judge Steven Rhodes of the United States Bankruptcy Court, denied Detroit’s pension funds and unions an attempt to have the bankruptcy action thrown out. Essentially, the city of Detroit is eligible for bankruptcy protection. The judge’s ruling opens the door for public pension cuts for troubled cities and municipalities in the U.S. – giving bondholders a level of protection for cities plagued with excessive long-term liabilities.
Detroit is faced with high crime rates, virulent blight and lack of public services – the victors of the ruling are happy to give Detroit a fresh start.
Over a 90-minute summary of his ruling, the judge concluded that specific criteria were met in order for Detroit to receive protection from its creditors. Former industrial powerhouse, Detroit on December 3rd, became the largest municipality in the history of the United States to enter Chapter 9 bankruptcy. Chapter 9 bankruptcies are extremely rare and usually large cities like New York and Pittsburgh are able to find alternative solutions. To add to the financial headache, bankruptcies will likely increase borrowing costs for the city of Detroit.
After the ruling, lawyers on the city workers’ side argued they will appeal any verdict that cuts benefits – mentioning they are protected under the state of Michigan’s constitution.
Calculated by Detroit Emergency Manager, Kevin Orr, the city of Detroit has tried to tackle an estimated US$ 18 billion in debt and long-term liabilities. To put this into perspective, the last city bankruptcy was Alabama’s Jefferson County with debt over US$ 3.1 billion. Detroit is faced with high crime rates, virulent blight and lack of public services – the victors of the ruling are happy to give Detroit a fresh start. The judge mentioned in his ruling that, “As of April 2013, about 48 percent of the city’s street lights were not working.” He continued, “In 2012 the average police response time was 30 minutes; in 2013, 58 minutes; and the national average is 11 minutes.”
Last, one of Detroit’s former mayors, Kwame Kilpatrick, is serving 28 years in federal prison on corruption charges.
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