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Past City Bankruptcies Show There Is No Blueprint For Detroit Retirees

By Alan Pyke

"Past City Bankruptcies Show There Is No Blueprint For Detroit Retirees"

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detroitskyline-apEven with a half-dozen municipal bankruptcies from the past 15 years as a guide, there is no clear precedent to steer expectations among Detroit’s retirees as the Motor City’s bankruptcy filing proceeds. Cate Long, the municipal financing expert for Reuters, reviewed six insolvent cities around the country and found they don’t provide much of a road map.

Despite being less than one thirtieth the size of Detroit, the closest historical example may be Central Falls, Rhode Island. Long notes pensions were targeted immediately by a state-appointed official who oversaw the bankruptcy, and “retirees had no money or time to defend their pensions.” Emergency manager Kevyn Orr and Michigan Gov. Rick Snyder (R) have been unequivocal that some pension cuts are coming. But the numbers underlying their approach to retiree benefits are suspect, and worker advocates say they have not negotiated in good faith and are intentionally undermining retirees’ interests. In Central Falls, where the politics were similar, retirees eventually saw their pensions cut in half.

The case of Stockton, California may also prove relevant to Detroit. In Stockton, financial institutions that are being forced to take losses “appear to have convinced bankruptcy judge Christopher Klein that Stockton pensions should suffer haircuts if bondholders have to.” That case may give the Supreme Court a chance to rule on whether state constitutional protections for retirees, which Michigan has, supersede federal bankruptcy law that strips all creditors of contractual protections. Detroit’s bankruptcy fight is also likely to pit large financial companies against about 30,000 working people and their families.

On the other end of the similarity spectrum, the town of Vallejo, California ended up increasing its pension payments as it exited bankruptcy. In San Bernardino, California, “the city’s approach to its large pension liabilities is unknown.” Neither case bears much similarity to Detroit’s, but together with others Long examined they show that the bad news for Stockton and Central Falls workers may not mean Detroiters are doomed.

Prichard, Alabama has gone bankrupt twice, first in 1999 and then again in 2009. The 1999 filing showed the city had failed to make payments to pension funds despite deducting the money from worker paychecks. The resolution plan that let the town exit its first bankruptcy included a $16.5 million payment to those funds, but the second filing showed it never made that payment either. The city and its retirees remain in limbo because Prichard has failed to convince a judge it is eligible for bankruptcy.

Jefferson County, Alabama – the largest city bankruptcy in U.S. history, until Detroit took that crown in July – never even listed its pensions among the creditors it couldn’t pay. Pushed to bankruptcy by financial swindles involving some of the world’s biggest banks, the county decided to spare its retirees from the pain of bankruptcy. Long notes that county pensions were funded at about the same levels as Detroit’s fire and police pensions, well above the national average funding level.

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