Detroit, the first domino?

 posted at 6:41 pm on July 22, 2013 by Erika Johnsen
Almost immediately after they learned that Detroit would be officially filing for bankruptcy last week, some of the city’s various pension funds lost no time in filing suit against both the city’s emergency manager Kevin Orr as well as Michigan Gov. Rick Synder. Shortly thereafter, a Michigan judge tried to halt the proceedings, not merely because a municipal bankruptcy would fail to ‘honor the president,’ or something, but because the Synder administration was clearly trying to pull a run-around on the concerned pension funds — since Detroit’s utter brokeness was such a secret, and everything. A federal judge, however, has already set the first hearing in Detroit’s bankruptcy case for this Wednesday, via Reuters:

A federal court judge has set the first hearing in Detroit’s bankruptcy case for Wednesday to take up the city emergency manager’s request to put state lawsuits challenging the bankruptcy filing on hold.
U.S. Bankruptcy Court Judge Steven Rhodes agreed on Monday to the expedited hearing requested by emergency manager Kevyn Orr in response to a Michigan court judge’s order for Orr to withdraw the Chapter 9 bankruptcy filing on state constitutional grounds.
If Orr’s request is granted, top Michigan state officials, Orr and others would also be protected from litigation regarding Thursday’s bankruptcy petition.
Concerned that retirement benefits will be slashed, Detroit retirees, workers and pension funds have been running to state court in Michigan’s capital of Lansing in an effort to derail the biggest Chapter 9 municipal bankruptcy in U.S. history.

The sooner Detroit faces the music, the less remote the city’s chances of actual fiscal recovery, and Orr is reportedly trying to speed things along — but of course, the obligatory voices on the left are calling for the federal government to step in with a bailout and magically wipe their slate clean for them. First of all, I might venture that the federal government is currently running a yearly deficit of more than a trillion dollars, and that American taxpayers don’t have the money to spare for a city that willfully ran itself into the ground for decades. Secondly, as Mayor Dave Bing actually pointed out the other day when professing that, yeah, Detroit would “love” for Washington to bail them out, one of the biggest problems there is the precedent it sets for other cities in urgent need of financial reform. Detroit’s billions of dollars of debt perhaps sound like peanuts compared to the schemes the federal government is running, except that Detroit is hardly the only major city that’s been hovering dangerously close to the fiscal abyss with accumulated deficits and unfunded liabilities, and it could be that other cities are getting ready to follow behind. Says the Detroit Free Press:

From Baltimore to Los Angeles, and many points in between, municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center for the States, in Washington, estimated states’ public pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010. …
As examples of the results: Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates. …
Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities. While cities had long promised health care, life insurance and other benefits to retirees, “few … started saving to cover the long-term costs,” the report said. …
Last Monday, the bond rating house Moody’s also downgraded Cincinnati’s general obligation bonds, citing “budgetary pressure” from pension contributions. Its downgrade was to Aa2 — still a lot higher than Detroit’s Caa3 for its general obligation bonds — but another part of the trend.

Detroit may have been the biggest city to have filed for municipal bankruptcy, but it certainly wasn’t the first to do so — and it’s unlikely to be the last while major cities refuse to summon the necessary political will to stop piling up unsustainable amounts of debt and accept that it’s time to reform the extravagant pension and benefit systems for which they have no real plans to pay.