Federal Court: Detroit Can Proceed with Bankruptcy, and Municipall Pensions May be Reduced If Necessary

One of the notions flitting about with regard to municipal bankruptcies, has been the idea that where state law provides that municipal pension obligations cannot be discharged in bankruptcy, that’s that. We have always doubted the soundness of that idea because bankruptcy is uniquely a federal proceedings, so how can the states limit or even forbid its application to some creditors but not to others? Article I, Section 8 grants Congress, not the states, the power to establish “. . .uniform laws on the subject of Bankruptcies throughout the United States.” So how can each state decide for itself what bankruptcy protection to offer, to whom and for what? Of course, the state can still offer the best credit card for someone with no credit – we just need to decide what “no credit” actually means. And Article VI, Clause 2, of the U.S. constitution states

“This Constitution and the laws of the United states enacted in pursuance thereof . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitutions or Laws of any State to the contrary notwithstanding.”

So that would seem to be that. Right? But Detroit creditors, notably the unions whose [unfunded] pensions are the Big Dog in this fight, have been arguing that inasmuch as state law protects pensions in bankruptcy, federal courts can’t mess with them.

But the federal bankruptcy court in Detroit has just ruled that the City of Detroit may proceed with its bankruptcy in federal court, and that “Detroit’s obligation to pay pensions was not untouchable.”

The folks on the short end of this ruling vow to appeal, but your faithful servant, being a man of limited intellectual resources, can’t understand what the fuss is about, given that rather plain language of the Constitution. So stay tuned and see how it all turns out. If this is worrying you, never forget you can still make money in later years and not just fully rely on your pension schemes.

For a detailed, much more detailed, coverage of this development see the front-page story in today’s N.Y. Times (Detroit Ruling Lifts A Shield on Pensions, Dec. 4, 2013, A1). Click here http://www.nytimes.com/2013/12/04/us/pension-ruling-in-detroit-echoes-west-to-california.html?hp&_r=0

What we can’t understand, is that if the money isn’t there, and if it can’t be raised by taxes, Detroit’s population having gone bye-bye, and its property tax base having been largely reduced to rubble, whence can the money come from no matter what the union lawyers say? Like King Canute lacking the power to order the tides not to advance on English beaches, the authors of Michigan state laws (and the directives of courts of whatever kind) cannot order money to appear magically in the city’s coffers when it isn’t there.

So we’ll just have to stick around and see how it all turns out.