Dead or Broke, When is the Right Time To Deal with Unfunded Pension Liabilities
We all know the city of Detroit has filed for bankruptcy protection. The bankruptcy court is now conducting a hearing to determine if Detroit is eligible for protection under Chapter 9 of the U.S. Bankruptcy Code while it tries to restructure $18.5 billion in debt and other liabilities including pension funds the city says are underfunded by $3.5 billion. Unions and pension funds with much at risk in the bankruptcy claim Detroit isn’t eligible.
None of the parties question whether Detroit is in deep trouble. More than one-third of the city’s residents live below the government poverty line. There are some 78,000 abandoned structures and just 40 percent of the street lights work. The population has shrunk to less than 700,000, from a peak of 1.8 million in 1950, and only 53 percent of property owners paid their 2011 property taxes. The city filed the case on July 18, and it said about half of its liabilities stem from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions.
The pension funds’ attorney, argued that the city should not be eligible for bankruptcy protection because Michigan’s constitution protects pensions from impairment and the city did stipulate in its filing that pensions could not be cut. However the Judge was skeptical saying the U.S. Bankruptcy Code would not afford special protection to pensions because, “It gives a priority to one unsecured creditor over all the others. Or one group of unsecured creditors, over all the others.”
Pensions can argued that they cannot be impaired, but the reality is, at the end of the day, there isn’t enough money to pay them. The only question is how much does the city have to bleed before pensions obligations are curtailed. That is the question we have to ask in Glendale as well. Should we flat line first before we can start this discussion?
