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Clash of the Blue Titans in Detroit


Blue power is in big trouble in Detroit, where the threat of bankruptcy has both public sector unions and municipal bondholders at the barrel of a gun. Mary Williams Walsh’s report in the NYT today makes it clear that unless unions can find a way to make other creditors take all the pain, they’re going to be faced with a serious crisis:

The city’s proposals, which could give some bondholders as little as 10 cents on the dollar, are making some creditors think they would be better off in bankruptcy. They see the specter of a federal judge imposing involuntary losses as less ominous than it was for New York.…

But city retirees, facing the prospect of sharply reduced benefits whether in bankruptcy or under Detroit’s restructuring proposal, think they stand squarely on the moral high ground because despite the poverty of many current and retired members, they have already offered big concessions.

“It’s not the employees that are costing the city money,” said Edward L. McNeil, an official with the American Federation of State, County and Municipal Employees who is leading a coalition of 33 unions that will be affected by any restructuring of Detroit’s debts, which total roughly $17 billion.

Unions seem determined to fight municipal bond market investors over who should shoulder the burden for Detroit’s debts, setting up a lose-lose situation for blue politics.

If the unions win, it could lead to an implosion in the municipal bond market across the country as lenders realize that money lent to struggling cities may never be paid back. As Walsh notes, this outcome would upend standards that “such bonds are among the safest investments and that for ‘general obligation’ bonds cities could even be compelled to raise taxes, if that’s what it took to make good.” This would be disastrous for other cities, which would find it much harder to borrow money, and would likely need to pay exorbitant interest rates to do so.

If the unions lose, however, it would deal a major blow to support from their own members. Detroit’s pensioners would begin to wonder why they pay dues to a union that can’t guarantee the pensions or benefits they were promised. A similar dynamic all but destroyed unions in the private sector as striking union members saw their jobs shipped away to China.

The stakes are high in Detroit’s looming legal battles, but the results will rock the blue model to its core no matter where the dominoes fall.

[Detroit image courtesy of Shutterstock]

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  • Stacy Garvey

    I feel for the union member, not only in Detroit but in cities across the nation, who are going to see the world they know implode. They seem oblivious to the changing landscape. We’re slowly taking apart the blue social model. It would be significantly more desirable if those folks who have the most at stake where able to grasp the consequences.

    • Corlyss

      They ought to get an education in some field that isn’t owned by a union.

    • Pete

      You feel sorry for government union members!

      These people have been grossly overcompensated relative to the private sector workers for over fifty years now.

      And, they have been overstaffed at the same time.

      As for having these people grasp reality, forget it. Many of them actually believe their own propaganda that they’re society’s ‘everyday heroes’ and deserve even more than what hey have been GIVEN and promised.

    • Ritchie The Riveter

      The Blue Social Model is an unsustainable mirage … it was destined to come apart, with or without our intervention, for it suppresses the intellect and initiative – the “secret sauce” of our pursuit of happiness, both individual and societal – of the vast majority of our citizens.

      The only question, is just how painful the disintegration will be. The longer that each of us continue to outsource our initiative and responsibility to the Cult of the Credentialed and Connected Omniscient that is currently running things, the more painful the process will be at the end.

      • megapotamus

        Grand and obvious wisdom here.

  • Corlyss

    “If the unions lose, however, it would deal a major blow to support from their own members.”

    This is an outcome so desirable that I have to rank it among utopian solutions.
    There’s been no excuse for unions since 1888, when the first government office on labor was established, or 1903, when it got half its own agency, or 1913 when it became its own fully-fledged cabinet level agency. None. With the entire weight of the federal government brought to bear on behalf of corrupt union machinery and mafia-linked mobsters, there’s no need for unions, period.

  • ljgude

    Since the Great Depression America has been pursuing the Keynesian policy of deficit spending such that government at all levels (aka the public sector) has been absorbing the unemployment associated with the down side of the economic cycle by hiring the excess labor and adding additional functions – needed or not – to the portfolio of government. On a 15 minute stretch of I 95 near West Palm Beach when visiting my son I notice 5 or 6 different species of police and sheriff’s cars. A friend with a boat tells me there are three different kinds of water police on South Florid’s extensive waterways. In Western Australia we are blessed with a single police department for the entire state which is approximately one third the size of lower 48 states. The problem is akin to a latching system on a well that prevents the bucket from falling back into the well if you let go of the handle. Big Blue government and Unions, and to a certain extent big companies sitting on obsolete business models like broody hens are all part of the problem. Add big medicine coming in at 17.5% of GDP and similarly overpriced higher education and you get a glimpse of the larger problem. We have an imbalance between the public and private sectors which I believe, given human nature, will only be corrected by collapse as it is beginning to happen in Detroit.

  • ebola131

    You know, it’s not such a bad thing.

    Governments borrowing money and placing their residents in long term debt is an anathema to the Founders.

    A steep rise in interest rates may be a good thing…would suppress the borrowing.

  • iconoclast

    Sooner or later the cronyism inherent in the Democrat-public employee union money laundering scheme was going to crash. And, be assured, that the politicians and union leaders will not pay the price. The citizens and the union members will.

    At least the citizens can run for it.

  • Freddie Sykes

    If we wish to be a nation of laws, we must let the situation be settled by our imperfect bankruptcy courts.

    Hopefully, the federal bureaucracy will not start a bullying campaign against the bondholders as it did in the GM case and made the debt holders and salary workers suffer while the union employees are made whole. I fear that politicians will once again subvert the law.

  • David Govett

    Chicago and Detroit go to war with each other.
    Both lose.
    Receive American support until they recover.

    Worked for Japan and Germany.

  • cubanbob

    Wait until retirees and those with IRAs and 401Ks find out just how toxic government general obligation bonds. Then the food fight will really begin. The public sector retirement funds are going to be between a rock and a hard place as well when they inventory the GO bonds they hold especially of those in jurisdictions that are already shaky.

  • catorenasci

    It’s hard not to be sympathetic with some of the older retirees – those well into their 70s or 80s, who were municipal employees back in the day before public employee unions, when the trade off was lower salaries for a more comfortable retirement. Since unionization, however, it’s been grossly overpaid employees and overly generous pensions.

    Nonetheless, the unions and their retirees are unsecured creditors and have to understand that their claims have no higher (and no lower) priority than any other unsecured creditor.

    If the bondholders get $0.10/$1.00, then the retirees should get $0.10/$1.00. At least there will be some sort of PBGC backstop that the other unsecured creditors won’t have. Perhaps, actually, that should be taken into account when determining how much the retirees should get from the wreck of Detroit.

    • cheeflo

      Agreed. My sister’s 90-year-old father-in-law is a retired Detroit fireman, betrayed by the city he served.

  • AD_Rtr_OS

    I’m sure that several CA cities that are in, or contemplating, BK will be watching the result of this clash with great interest.

  • megapotamus

    I know the recent history of the Voter News Service and all but this is actually Red vs Red. Commie vs Commie. Nothing more. Nothing less. Nothing else. If only they could be quarantined. Sterilization might work if only we had the time.

  • Mike55_Mahoney

    Both Shared in the gain. Both should Share in the losses. Hm. Novel thought?

  • ChuckFinley

    I wonder how the retirees would feel about auctioning off the artwork at the Detroit Institute of Art. I mean not just the people who retired from government employment in Detroit but also the retirees with Detroit municipal bonds in their 401k portfolio.

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