The moral of the story is that your public sector union can corner the market on politicians and get any benefits it wants out of them, but those benefits are all subject to the financial viability of the city.
Detroit filed the largest-ever municipal bankruptcy in U.S. history on Thursday, marking a new low for a city that was the cradle of the U.S. automotive industry and setting the stage for a costly court battle with creditors.
The bankruptcy, if approved by a federal judge, would force Detroit’s thousands of creditors into negotiations with the city’s Emergency Manager Kevyn Orr to resolve an estimated $18.5 billion in debt that has crippled Michigan’s largest city.
The future of retiree pension and health benefits for thousands of city workers hangs in the balance.
Anticipating the filing, investors drove prices of Detroit bonds and notes lower, sending their yields to record highs on Thursday.
This is hardball. It means that Detroit’s credit rating is more trashed than ever, but it’s being done as leverage for playing hardball with the creditors while hoping to somehow reconstruct things after emerging from bankruptcy to make the city into more of a viable financial investment.
The long and short of it is that the tax base doesn’t exist. Much of Detroit doesn’t even pay property taxes. The public sector employee costs are huge for a city that is losing its population.
Detroit has been running on borrowed money and the time is now up.
In June, Orr presented a proposal to creditors offering them pennies on the dollar. His plan had met with resistance from some creditors, most notably Detroit’s two pension funds representing retired city workers. The funds recently filed lawsuits in a state court challenging the governor’s ability to authorize Orr to file for bankruptcy.
Ed McNeil, chief negotiator for a coalition of 33 unions that represent most of the service workers for the city of Detroit said the bankruptcy filing was about “busting the unions.”
So this is a showdown. And the whole mess which will drag on for years will be watched closely by struggling city governments across America.
Douglas Bernstein, a bankruptcy attorney at Plunkett Cooney in the Detroit suburb of Bloomfield Hills, said he expected the case would last one-to-three years and would be very costly.
“This could run to tens-of-millions to hundreds-of-millions of dollars,” he said.
Let the fun begin.