Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, was blunt in his assessment. “This is one of the strongest protected pension obligations in the country here in Michigan,” he said. “If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone.”
Other than the Sox beating the Tigers in the ALCS, we don’t have much to do with Detroit, but a ruling in the U.S. Bankruptcy Court yesterday on the city’s petition for Chapter 9 reorganization has implications for every state and municipal employee and retiree. Despite a provision in the Michigan Constitution that said government employee pensions could not be unilaterally reduced or modified, the bankruptcy judge ruled otherwise and now retirees from the city of Detroit are just normal creditors like the company that supplied paper clips to city hall and those who invested in the city’s bonds. Because of the Supremacy Clause in the US Constitution, in a conflict between federal law and state law, federal law wins. The bankruptcy court’s decision will be appealed and you can never prejudge an appeal, but it’s always tough to overturn the initial ruling.
Why should this matter to retirees of the city of Lowell or the Commonwealth of Massachusetts? Because as is pointed out in the New York Times article that is the source of the above quote, this is the first ruling of this type anywhere in the country and now that it is on the books, other governmental entities in distress might be tempted to seek bankruptcy court protection to wipe the slate clean and start fresh. Neither the city of Lowell nor the Commonwealth of Massachusetts appear to have any serious problems with current pension funding, but the Detroit case is a reminder that sound fiscal management at the state and municipal level is critical to the long term viability of the interests of many.