the Coming Crisis – Part Iv

Pension Plans And The Detroit Bankruptcy

   This is Part IV in the series on Pension Plans And The Detroit Bankruptcy: The Coming Crisis. Please refer to the prior articles in the series for context.

Another possible victim of the bankruptcy plan offered by the city of Detroit is its treatment of individuals with lawsuits against the city. Jessie Payne, a 72 year old Detroit resident. Ms Payne was making her way to a doctors appointment when a Detroit city bus plowed her over, causing serious injuries. Payne eventually secured a judgement against the city in the amount of 3.5 million dollars, and was about to depart her home to pick up a check, when she received word that the funds would not be available due to the Detroit bankruptcy.

Ms. Payne now receives rehabilitation treatments five days per week and will have to wait thirty years to receive a total of about 12% of the judgment she and her attorney procured.

A similar fate awaits Dwayne Provience who was incarcerated for more than a decade for a crime he did not commit. Bill Goodman, a civil rights attorney who represents four claimants affected by the bankruptcy, states “The system favors the wealthy and powerful and to some extent, the labor unions”. This statement appears substantially true, especially as addressed to the labor unions, particularly the police and fire unions.

Laura Bartell, a professor at Wayne State University, agrees, “The persons or groups that are receiving unfavorable treatment under the bankruptcy plan are people who do not have a strong lobbying position with the city of Detroit”. She continues that, “Everybody who’s gotten more ad had legal leverage with the city”.

Considering the generous terms offered by the city of Detroit to its police and fire pensioners and unions, it is obvious why these groups would approve the bankruptcy plan proposed by the city and the other creditors would vehemently oppose. Less obvious is how this bankruptcy plan could possibly succeed. Detroit projects that its return on pension investments should improve to about 6.75%, providing sufficient monies to continue the pension programs proposed by the city. Many commentators believe that rate of return is unrealistic.

Furthermore, if the bankruptcy judge somehow approves or crams down the Detroit bankruptcy plan, the investors in municipal bond markets will likely be hesitant to invest in such devices in the future. What investor would rationally invest in such a device or product, subject to the possibility that that governmental entity will file bankruptcy, pay its pensioners substantially their full pension, and leave bondholders with little or nothing. The Detroit bankruptcy offers ramifications to other United States municipalities that must issue bonds. Either the financing will become progressively more expensive for these municipalities or such municipalities will be unable to secure financing at all.