The recent landmark court ruling that legitimized Detroit's bankruptcy eligibility to seek Chapter 9 protection under the bankruptcy law has many legal analysts wondering how the case - currently, the largest municipal filing in U.S. history - will affect the pension systems of other distressed cities and counties.
Municipal bankruptcies have historically been rare, but in the years following the economic collapse and subsequent recession, a number of municipalities have been forced to seek out protection under bankruptcy law
. In many cases - such as those of Central Falls, R.I. and San Bernardino
, Cali. - pension liabilities have taken center stage in bankruptcy proceedings and raised questions about the legal status of pensions and cities' obligations to continue paying them. Now that Detroit will be permitted to seek bankruptcy and reduce its pension obligations, other government workers in other cash-strapped states are concerned that their pensions may face the same fate.
For instance, Bloomberg reported that Illinois lawmakers voted to approve a $160 billion restructuring proposal on the same day that U.S. Bankruptcy Judge Steven Rhodes ruled that Detroit may cut retirement benefits. In light of the decision, employees of hard-pressed states - which include Wisconsin, Indiana, and Michigan - fear that municipalities may follow suit and slash pension benefits to alleviate financial ills. Although Judge Rhodes asserted that he would not approve a Detroit restructuring plan that included steep pension cuts, unions and pension funds are incensed that a municipal bankruptcy filing essentially trumped a state law that prohibits cities from reducing pension benefits that workers have already earned.
As the Detroit bankruptcy eligibility case unfolds over the next several months, city and state obligations to satisfy pension contracts - once considered to be inviolable - will come under significant legal scrutiny and perhaps change the bankruptcy landscape on many fronts.