The Meaning of Detroit
In this National Affairs article, David Skeel tells the story of the Detroit bankruptcy and the implications for other cities. Detroit was the first major U.S. city to declare bankruptcy and also the first instance where a court formally ruled that pensions could be restructured. While pensions were reduced, however, retirees received a significantly greater share of benefits than the city’s creditors. A “grand bargain” transferred one of Detroit’s key assets—the Detroit Institute of the Arts—to a new non-profit organization for $816 million. In exchange for legally committing the art and museum in Detroit in perpetuity, the $816 million was allocated toward pension beneficiaries. The result was lower cuts for workers, amounting to at least 60 percent of the unfunded portion of retiree pensions in addition to retaining the funded portion. In contrast, the city’s bondholders were only offered 10 percent of what was owed. Detroit’s plan of adjustment was approved in November 2014.
Skeel describes bankruptcy as a meaningful new option for cities struggling with pension debt. Not all cities can file for municipal bankruptcy, however, and Skeel argues that the requirements for municipal bankruptcy should be updated. Current municipal bankruptcy rules require states to expressly allow cities to file, and cities must show that they are incapable of paying debts when they are due. But for a city like, Chicago, most of its pension liabilities are future rather than current expenses. As a result, Chicago's pension fund would have to be near a collapse before the city could actually file for bankruptcy; meanwhile, the city's pension debt would continue to crowd out services. In 2010, Congress gave regulators the authority to take over financial institutions in default or in danger of default. Skeel recommends that a similar standard could be applied for municipal bankruptcy.