OT - Federal bankruptcy law vs. pensions backed by state constitution
While there is a four page thread already discussing Detroit's bankruptcy, I'd like to discuss the legal (absent political/social concerns) aspects of the bankruptcy.
While I am not an attorney, I find this case to be fascinating and legally unprecedented; the size of the pension obligations owed (Orr has said that a majority of Detroit's debt consists of legacy pension obligations) is unprecdented for a city that has declared Chapter 9 bankruptcy.
There have been a few other instances similar instances(Jefferson County Alabama, Stockton California) the obligations owed by these municiplaties pale in comparison to what Detroit owes to its pensioners. In the prior instances, I believe the state stepped in and helped meet the financial shortfall. Is the state of Michigan in strong enough financial shape to pay out $10+ billion over the course of the 20-30 years as the pensioners age? I believe the answer to this question will be yes (frankly, there is no alternative; PBGC is only for non-government pensions), but it's going to be a very drawn out legal fight between the pensioners and the Lansing until then.
tldr; will this reach the supreme court?
ps - while initially researching this topic, I came upon this paper - http://www.aefpweb.org/sites/default/files/webform/Stuart_Buck,_Legal_Obstacles_to_Pension_Reform.pdf , which I thought was a great read
They can sell off their excess sports memorabilia to fund it...
What a mess
Just saw that a state judge found that the bankrupcty filing was unconstitutional and has to be withdrawn. (This was a text from the Freep. I have declared the jihad over and downloaded the Freep app.)
Only in Detroit.
Ingham County judge rules Detroit bankruptcy be withdrawn
Lansing — Ruling that the governor and Detroit’s emergency manager violated the state constitution, an Ingham County Circuit judge ordered Friday that Detroit’s federal bankruptcy filing be withdrawn.
“It’s absolutely needed,” said Judge Rosemary Aquilina, observing she hopes Gov. Rick Snyder “reads certain sections of the (Michigan) constitution and reconsiders his actions.”
Aquilina’s ruling should quickly move state-level legal skirmishing over the Detroit’s Chapter 9 bankruptcy strategy into the Michigan Court of Appeals.
This is a really great display of the functionality of checks and balances in Michigan government (something which Snyder's overruling of the populace by getting a new emergency manager law passed put into doubt).
I have a question for the bankruptcy lawyers: why don't pension obligations just trump unsecured loans and other categories of debt entirely? Is there a possibility that the state constitution gets interpreted as requiring making 100% of those payments, even if it means 100% haircuts for various other stakeholders?
The problem is that if pensions were higher in priority than unsecured bonds, no one would ever be able to issue unsecured bonds again.
Here is why: many (probably most) US cities/states have massively underfunded pensions. If you had to issue debt that was junior (lower priority) to the pensions, there would be a much higher probability of losing all of your money in those bonds, and hence the rates would be much, much higher. In many cases, certainly including Detroit's over the past decade, the rates would have been so high as to inhibit issuance of bonds at all.
Some cities have underfunded pensions that they will eventually work their way out of, but need access to cash right now (or, better example, in say 2010 when tax receipts were unusually depressed due to the recession). If pensions had higher priority than unsecured claims, they wouldn't be able to get those deals done, and many more cities would go bankrupt due to lack of funds. Those bankruptcies are avoidable if the city simply has access to the credit markets -- so it is important that in trying to protect people, you do not accidentally cut off access to the credit markets.
When I was in grad school, I wrote a paper about how corporations have amazingly lax rules on this sort of thing. Specifically, corporations are able to pay dividends and buy back shares even with massively underfunded pensions. I think that is probably poor public policy. I would like to limit withdrawls by equity holders unless pensions were funded. However, I would not advocate for putting pensions ahead of unsecured credit, because that would simply cut off credit to many firms and force them into bankruptcy due to a solvable liquidity situation instead of a true lack of solvency...
In theory you only want cities taking on more debt when they can really work their way out of the hole. Even if loans were behind pensions in bankruptcy court, that shouldn't cut off credit for cities that are actually in position to dig out. So cities in position to dig out shouldn't see much higher rates. (If they would, that seems to me like solid evidence that the current system is rigged in socially undesirable ways.) And cities not in position to dig out shouldn't be allowed to put more creditors ahead of pension obligations anyway.
I have a question for the bankruptcy lawyers: why don't pension obligations just trump unsecured loans and other categories of debt entirely?
There are practical reasons (the ones outlined by the previous poster), but the legal reason is that they just don't. Bankruptcy is a very technical area of law, and Congress hasn't carved out pension obligations.
Is there a possibility that the state constitution gets interpreted as requiring making 100% of those payments, even if it means 100% haircuts for various other stakeholders?I really, really doubt it. The constitutional language isn't worded that way, and even if it WAS worded that way, it would be completely trumped by the supremacy clause.
But are you an expert? =P
Serious question: I get that chapter 9 is federal thing. Does it specify the repayment order? I'd have thought Detroit could only issue bonds subject to state law. So it strikes me as weird that the Supremacy clause comes into play, unless chapter 9 is really specific (and, I'd have thought, more specific than necessary) about how repayment has to work.
And the AG has appealed.
I am surprised that the Judge's order didn't address the federal supremacy issue at all. It's possible that this issue wasn't argued to her, but it seems to be the central issue in this case.
What's the over/under on how long it takes the Court Appeals to issue a ruling? I say 11:00 a.m. on Tuesday. I might even take the under.
How about an over/under on the probability of it being overturned on appeal? 99.5%?
Maybe supremacy/premeption cases are just as easy as "fed wins." However, my gut tells me that this is one of those issues where the research will show it is much more complex.
Also, this is a HUGE issue. Pension liabilities are enormous. Art. 9, Section 24 is a big deal in protecting pensions/prohibiting change depending on whose point of view you adopt. If the precedent gets set that cities can avoid Art. 9, Section 24 through EFM/bankruptcy, I would expect to see more filings.
I hate to see this issue being decided in a rushed fashion. I hope the Court of Appeals takes its time, or lets the issue be decided by the bankruptcy judge in a thoughtful manner after it is fully briefed.
This WaPo article claims that Federal Bankruptcy law gives states the power to restrict municipal bankruptcy filings.
but Orr is serving under a State law that says a City can file under certain circumstances - including when an Emergency Financial Manager has been appointed and the Governor signs off. Those conditions have (I beleive) been met. The Constitutional provision says nothing about filing for bankruptcy. The article may have missed the point.
If the order basically barred the action of the emergency manager or effectively says the emergency manager does not have standing, then the supremancy issue does not apply. The Chap 9 was a voluntary action which requires standing to do. The Michigan court is basically removing standing from the governor and emergency manager wrt bankrupcy court.
So in effect the court is nulifying the filing by making it as if I filed your bankrupcy without your approval and as you.
I can see your line of thought. it is kind of a chicken and egg thing - where you stop depends on where you start. In theory, the filing evoked a stay (at least I think) of the Circuit Court and this decision should have been made by the Bankrptcy Court.
If that was the Judge's thought process, I wish she would have said so. I am a practicing lawyer in Michigan (not bankruptcy) so I get that Circuit Court Judges do not typcially issue written opinions. However, this isn't a typical case. Hopefully the Court of Appeals (which does normally issues written opinions) throughly addresses all of these issues. I think that there a number of other municipalities in the state that could also file in the near future. It would be good to have these issues thoroughly briefed, argued and addressed.
The Judge's result would also have dire consequences. If retirees are 100% immune from cuts, then the bond holders will take most of the hit. If this is found to be law in MIchigan, then every public entity in the state will have a hell of a time borrowing money at reasonable rates. Don't get me wrong - the law is what it is. But this decision will have huge consequences - it deservers thorough consideration. Not a two pager with a hand written note that a copy will be sent to the President (God knows why.)
OK, I'm going to put a serious response below, but check out her picture... did Monica from friends just issue a ruling in a Michigan courtoom?
Dating myself here...
When the Free Press did a human interest story a few weeks ago, almost every single person used in the story retired either in their late 40ties or early 50ties. There is your basic problem. For decades the unions resisted any downsizing. Furthermore they on average worked ten years less then a typical private sector employee. If the average age of retirement was 62 the pension funds might not be in such dire straights. It is really hard to support a labor pool if people are retired for as long or longer then they worked.
So a combination of early retirement, bloated payrolls, reduced revenue, and increasing health care costs have made current payouts unsustainable. Not a easy solution as some of these people are screwed without social security. I guess the moral of the story make sure you have something else other then a pension.
Detroit used to have a 20 and out rule under which you could retire after 20 years. If you started at in your early 20s you could retire (with life time health care and pension) in your early forties. A lot of folks did and got jobs in other towns. If those towns had an age 60 and 10 years of service (or 55 and 15), a Detroit retiree could earn a second pension and still be young enough to work at a third place. But you can easily have a situation where Detroit is paying retirement benefits for twice as long as someone worked.
And that, for the most part, is absurd.
Age+years of service is likely where we're headed if pensions in general are to survive, but the number is going to have to be much higher than the number of 70 you've put in your post (the 55+15 and the 60+10). The bidding in general is going to have to start somewhere in the neighborhood of 85-90. At 90, if you hire in at 18, you can go at 54 (54+36 years). Now, obviously there is going to need to be a lower number for cops and firefighters, who are normally in harm's way, but the idea where you can work 20 years, retire at 45, live to 80, and draw a pension for 35 years where you worked for 25, is pretty foolish. Eventually the math turns against you quite harshly.
Quick story: after graduating from college, one of our clients (I'm a CPA) was an electrical contractor who used IBEW Local 8 union electricians. IIRC (and forgive me, as this has been 16 years ago), those boys made a nice living (just under $30/hr), plus benefits and retirement once they hit 200 hours worked for the year through IBEW. I believe they needed 75,000 hours worked before they could draw their pension. Now, even though those guys typically worked 10 hour days for our client, that's still 30 years at 2500 hours a pop, likely longer. There was no 20 or 25 and out there.
From all the excellent discussion about municipal pension liability and the legal/ethical position of the pensioners, I haven't seen (might well have missed) any discussion about social security. With some possible exceptions, city employees --- and this includes police and fire --- are not covered under OASDI, the official (Old Age Survivors, and Disability Insurance Act) name for social security. Part of the "contract" that UWS-Blue so articulately laid out is that the relatively more generous pension benefits a retired muncipal employee receives are in part a recognition of the benefits that employee does not receive from social security. This makes the employee's position with regard to unfunded pension liability all the more precarious, given that he or she usually has no other income stream to compensate for any pension benefit loss.