In re City of Detroit, Michigan – Part II

Today marked a significant event in the ongoing Detroit saga (which I previously wrote about here), with a federal bankruptcy judge ruling that the city was, in fact, eligible to file bankruptcy. That may sound like a well, duh conclusion, but it was not at all guaranteed, nor is it insignificant.  Some of Detroit’s creditors, including its pension funds, had challenged the city’s eligibility for bankruptcy protection, which will allow Detroit to less than fully fund its public employee pensions. In most bankruptcies, creditors get cents on the dollar, and the effect of the court allowing Detroit to file bankruptcy means that the pension funds will be treated no differently – even though Michigan’s constitution specifically protects pensions.

It’s a tough issue and, as with anything else, the “right” conclusion depends on who you are. Detroit city employees and retirees understandably want what they’ve been promised. Some even claim they will be financially ruined. Others want to see Detroit move through this process quickly and rebuild, creating a better-run, revitalized city. If there was never going to be enough money to fund the pensions anyway, what does it matter? Like it usually is, the truth is probably somewhere in the middle.

The pension funds, and other creditors, will likely appeal today’s ruling. But what is the alternative? Detroit is a city that has run out of options. Here’s hoping this ugly process will be the start of better things ahead.

The Times has a good story on this here.

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