Detroit’s grand bargain has cleared at least one hurdle, as retirees bit the bullet and accepted pension cuts. In a court-ordered vote, a majority cast their ballots in favor of the pension cuts prescribed by the plan, fearing that a rejection could lead to a worse outcome. The NYT reports:
The balloting revealed a belief by current workers and retirees that the city’s offer — as much as 4.5 percent cuts to some pensions and diminished future cost-of-living increases — would be even worse if this one was rejected. It also reflected a series of deals struck over months with the leaders of unions, retiree groups and pension funds who had, in some cases reluctantly, called on their members to vote yes to cutting their own pensions. Some retirees said they had voted yes because they felt there was no good alternative.
Even more painful cuts may lie ahead, however. Other creditors claim, correctly, that the current plan favors retirees over other creditors. That may not be legal, as the creditors will argue before a judge this August.It’s worth recalling some history here. The foundation of the American financial system was Hamilton’s plan for the federal government to assume the war debts of all the states. While the plan stabilized the country’s finances and cemented the federal union, it meant that many revolutionary veterans got the short end of the stick compared to financial speculators who bought, sometimes on the basis of insider knowledge, deeply discounted state debt from soldiers and widows for a fraction of its value.The principles under which that settlement was reached, disquieting though the consequences sometimes are, remain a cornerstone of effective financial markets today. If the Detroit deal stiffs other creditors to favor retirees, the municipal finance market will take an ugly hit, and every city and town in the United States depends on that market to manage its budget and long term obligations. The ability of local governments throughout the country to meet their citizens’ essential needs could be seriously weakened.Litigation over the complex and in many ways heartrending Detroit bankruptcy case will go on for some time. It will be important to remember that the real criminals are the members of the corrupt, one-party urban political machine that looted a declining city and drove it into the ground. City union leaders were part of a criminally negligent establishment that, with an enabling press and national Democratic Party leadership, brought this catastrophe to pass.