Judge Steven W. Rhodes’ decision to allow Detroit to file for municipal bankruptcy may prove to be a landmark in the history of urban America. This is only partly because it enables the fabled Motor City to make a desperately needed “fresh start,” as Judge Rhodes put it. Hemorrhaging population, plagued by inadequate public services and saddled with $18 billion in debt, Detroit had little alternative but to seek permanent relief from its creditors. Now the city is that much closer to the day when it can implement emergency manager Kevyn D. Orr’s farsighted plan for reactivating vital functions such as police, street illumination and derelict housing clearance.
The case gets its potentially historic significance from Judge Rhodes’ holding that the city may reduce pension payouts to public-union workers as part of a settlement with creditors. It’s the first time that a federal court has concluded that Chapter 9 of the federal bankruptcy code trumps state-law protections for public-worker pensions, even in states, including Michigan, that had purported to shield them via a state constitutional provision.
This appears to set a powerful precedent for at least the 24 states that specifically authorize municipal bankruptcy, and possibly the others, too. Consequently, mayors and city councils in distressed municipalities could wield enhanced bargaining power in their negotiations with public-sector unions. Help us limit unfunded-pension liabilities, they can argue, or you may find yourself dealing with a bankruptcy judge some day.
Detroit’s public-sector unions have vowed, not surprisingly, to overturn Rhodes’ ruling on appeal. But they should fail. We do not say this because Detroit workers’ pensions are exorbitant — at an average of $19,000 per year ($30,500 for police officers and firefighters), they are not. We simply believe that Judge Rhodes’ decision correctly interprets the Constitution, which establishes the supremacy of federal law, and the statute, which embodied Congress’ intent to give distressed cities maximum financial flexibility. Now Detroit can use that flexibility, tempered by the judge’s admonition that any cuts be “fair and equitable.”
Instead of fighting the ruling and risking an even more consequential defeat at the Supreme Court, unions should be pondering its lessons. The most important of these is that their positions in collective bargaining should reflect what’s good for their members and what’s sustainable for their city governments and the taxpayers who support them. The goal should be to ensure that future retirees can count on what is promised them because the promises are founded in fiscal reality.