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Blue Model Blues
Detroit Meltdown: Appeals Court Rejects Pensioners’ Challenge

Public union leaders, take note: A U.S. Court of Appeals just struck a major blow against retired public workers challenging Detroit’s cuts to their benefits as the city claws its way out of pension-induced bankruptcy. Reuters reports:

A divided federal appeals court on Monday rejected claims by Detroit retirees that their pensions were unfairly cut to help the city end the largest U.S. municipal bankruptcy.

The 6th U.S. Circuit Court of Appeals in Cincinnati said restoring the pension cuts would “unavoidably” unravel Detroit’s reorganization plan, which helped the city shed $7 billion of debt and end its 17-month bankruptcy in December 2014. […]

Thousands of retired Detroit city workers were subjected to 4.5 percent pension cuts, the end of cost-of-living increases, and reduced insurance coverage to help the city close a $1.88 billion pension plan funding gap.

One of the most significant obstacles to pension reform is the political capture of state and local governments by public sector unions, whose priority, for better or for worse, is to guarantee maximum possible compensation for their members. In the short run, demanding implausible retirement benefits is good politics for union leaders, and acceding to those demands is good politics for legislators who hold the purse strings. In the long run, however, such promises exert tremendous strain on state and local budgets and can even force them into bankruptcy, as has already taken place in places like Detroit and Puerto Rico, and is just over the horizon for cities like Chicago.

The story of Detroit’s fiscal cataclysm is: Once cities go into bankruptcy, all bets are off for public pensioners. So it’s not in the interest of public sector unions to squeeze every cent they can from local governments. If their employer goes belly-up, they may be left with far less than they first bargained for.

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  • Kevin

    A few more rulings like this and public sector unions may come to see defined contribution plans (either by employee or employer) where the investments are held by an independent agent of the employee rather than simply guaranteed by the municipality as a wise choice. It’s probably too much to hope this will lead to more transparent and sustainable public sector compensation schemes.

  • Anthony

    A rarely known (or discussed) fact is that Detroit’s bankruptcy reorganization requires new hires who retire after 30 years to receive pensions costing 40% less in inflation-adjusted dollars than those who just lost at the 6th Circuit (Federal Appeals Court) – also new workers contribute 10 times more since reorganization than those grandfathered (the plaintiffs) into defined benefit pensions. In addition, negotiated settlements to salvage financially shaky public pensions have taken place (Atlanta, Georgia and Lexington Kentucky are two past examples); there are even some 401(k)-style contribution plans in the various negotiations trying to stanch the state and local pension meltdowns. So, self-serving concessions to preclude bellying up are not anathema to public sector unions.

    • seattleoutcast

      It appears from what you’ve mentioned here is that the best success a city can have in staving off greedy public unions is if they come from a conservative area. There may be more to it, of course, including a less established “machine” such as Chicago, Baltimore and Detroit.

      • Anthony

        That’s your inference but the evidence makes no distinction (and I used those two examples randomly) – however as I informed FriendlyGoat TAI’s general orientation leans to interpret…

        • seattleoutcast

          The evidence makes a huge distinction. That is what WRM has been showing for years. The blue model is a failure, and the bluest of the blue cities are in the worst shape. Those cities have been run by democrats for many, many decades. You are ignoring this evidence and implying that I am inferring.

          • Anthony

            I have no idea what you’re referencing (I try to avoid cross purposes where possible). So, we’ll end here, thanks.

      • Andrew Allison

        My take is somewhat different, namely that the only thing which will bring some sanity to this mess is municipal bankruptcy. The unions and the current retirees will fight to their last breath to maintain current, and even increase, benefits. Since most major cities, and many smaller ones are already effectively bankrupt if unfunded liabilities are considered, the sooner the better. The scary question is what the States, which can’t file, will do about city and county retirees whose benefits are reduced or eliminated. What I do know is that any public employee who isn’t saving like mad is mad.

        • seattleoutcast

          One thing not mentioned is how deeply in debt many cities are. They have been taking advantage of declining interest rates in bonds. Rather than pay back original loans, they have taken out more loans and used it to fund projects that will get the politicians elected. Now that we’ve reached zero for interest rates, there is no place to go but up. Servicing that debt accumulated for thirty years is going to eat into every city’s budget.

          • Andrew Allison

            “Since most major cities, and many smaller ones are already effectively bankrupt if unfunded liabilities are considered, . . .” What this means is that they can pretend to be solvent as long as they can service their debt, but GAAP accounting demonstrates that they cannot.

        • f1b0nacc1

          What makes this even more frightening is that many of the states where there worst cases exist have large splits between the Democrats in the urban areas, and the GOP in the rural parts of the state, with a sort of political trench warfare in the suburbs. So what would happen if Chicago went bankrupt, and used its leverage at the state level to impose a bailout financed by the state? I suspect that the political calculus for most of these cities (blue or otherwise) is that reforming the system would be almost immediate political suicide, while trying to ride the tiger for a bit longer and get out before the collapse offers them some chance of lucrative rake offs if they time it well.

          • Andrew Allison

            You’re right, of course :<(( but there's one more level of this particular purgatory, the States trying to get a Federal bailout. Municipalities (Cities and Counties) will attempt to get the State to pick up the tab, and some States, we can guess which ones will agree and then seek Federal help because they are also bankrupt.

  • Andrew Allison

    What the record shows is that unions will fight to maintain current benefit levels even as they must be aware that those benefits cannot possibly be sustained. Does union management think like politicians, namely that they’ll be gone when the feces hits the atomizer? The current membership should be agitating for sustainability; there’s been enough publicity about this issue that they can hardly be unaware of what’s coming.

    • f1b0nacc1

      The current union leadership seems to believe (correctly or incorrectly) that they will either be gone (dead or retired, in the latter case living off their ill-gotten gains) before the breakdown occurs, or that the politicians that they have suborned will remain bought, and shield them from the relentless effects of mathematics. In a similar fashion, the retirees are focused on their immediate concerns, and most (not all) don’t plan particularly far ahead int he first place. Remember that whenever someone suggests that this is not a sustainable situation, you get the usual suspects like Anthony and the Goat who emerge and tell us that this will all be fixable if we just tax the wealthy enough. A lot of people , faced with the unpleasant choice of seeing their expected retirements go down the tubes because they aren’t sustainable without major sacrifices, or swallowing the innumerate silliness of the Left, chose the latter because it offers a less harrowing future to face.

      When things collapse, the fight may get very ugly indeed….

  • JR

    After the way Detroit’s secured creditors were treated, anyone lending long term to Blue “Machine” cities is fooling themselves. Since we already have Detroit as a precedent, I don’t feel bad for those who will suffer these losses.

    BUT, and I mean it seriously this time, have they thought of raising taxes to confiscatory rates above a certain random level? Since people have consistently shown absolutely no response to external stimuli, won’t that be the perfect solution???? Can I get an AMEN, FG???

    • CountMontyC

      The problem in raising taxes in Detroit is that most of those who could have paid the taxes have already left and most of those that are left have no money to pay the taxes.

      • f1b0nacc1

        Ah, but you aren’t using your imagination….what about getting the state of federal government to bail out the cities? Then you can pick the pockets of those that fled the cities and make them ‘pay their fair share’…. Really, how is this any different than ‘Free College for All’?

        Silliness of course, but almost precisely the sort of innumerate stupidity that you might expect to see in the very near future, particularly if HRC wins.

        • CountMontyC

          I took JR’s post to mean Detroit raising taxes and they can’t tax people not in the city. As to your suggestion that the state or federal government pay for it that has already been proposed

          • f1b0nacc1

            It has been suggested, and I suspect that if the Dems ever feel themselves to be safe from the wrath of those outside their strongholds, they will impose such a policy as quickly as they can. Margaret Thatcher once said that “the problem with socialism is that sooner or later you run out of other people’s money”, and the Dems are finding it particularly uncomfortable as they see the approach of that moment. They may get desperate trying to put off that evil day…

  • Matt B

    The courts will allow bankrupt municipalities to revise their pension obligations, but not so with states, which cannot declare bankruptcy.

    That leaves it up to the Feds to bail out Illinois and the other profligate states, right?

    Everyone now says monetary union was a stupid idea in Europe, but isn’t the US in the exact same situation? Can someone explain the difference between Illinois and Greece?

    • f1b0nacc1

      Fairly simple, actually. Greece could exit the Euro (and in fact could exit the EU, while Illinois cannot exit either the Dollar or the US. Should you doubt this, I suggest you review the events leading up to Appomattox. Because of this, IL could be permitted to collapse (death by court rulings) with far less damage that might be the case if one of the bigger EU countries (Greece is small potatoes, or should I say small olives?) like Spain or Italy did…

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