The Detroit court ruling that weakens public pension protections should be a wake-up call for taxpayers and government employees in other states.
DETROIT — In a ruling that could reverberate far beyond Detroit, a federal judge held on Tuesday that this battered city could formally enter bankruptcy and asserted that Detroit’s obligation to pay pensions in full was not untouchable.
The judge, Steven W. Rhodes, dealt a major blow to the widely held belief that state laws preserve public pensions, and his ruling is likely to resonate in Chicago, Los Angeles, Philadelphia and many other American cities where the rising cost of pensions has been crowding out spending for public schools, police departments and other services.
The judge made it clear that public employee pensions were not protected in a federal Chapter 9 bankruptcy, even though the Michigan Constitution expressly protects them. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said.
In particular, the Detroit ruling could be a game changer for California municipal bankruptcy cases.
The ruling by Judge Steven W. Rhodes, who is presiding in Detroit’s bankruptcy case, that public pensions are not protected from cuts could alter the course of bankrupt cities like Stockton and San Bernardino, Calif., that had been operating under the assumption that pensions were untouchable.
Uncertainty looms for Detroit retirees.
Are retirees going to lose their pensions?
Maybe. Rhodes ruled Tuesday that pensions, like any contracts in bankruptcy, can be broken. But he also warned city officials that they’ll need to justify any deep cuts that could threaten the lives of retired workers. There are about 23,000 retirees and 9,000 city workers. Most of them receive pensions that are less than $20,000 annually. Michigan’s Attorney General Bill Schuette says he will continue to fight Rhodes’ assessment that pensions can be cut, since public pensions are protected in the state’s Constitution.
What about New York?
I’m unaware of any New York municipalities or school districts that are in danger of bankruptcy. But with pension costs overpowering the ability of New York public schools to maintain student services and escalating 5,000% over the last decade in some towns, this latest development may diminish the perceived sanctity of guaranteed pension payouts. In any case, it’s hard to see how taxpayers can continue to pay the skyrocketing pension costs that have been the norm in recent years. We will have to wait to see how the pension crisis plays out in New York and other states.