Detroit was once a city of dreams. The anchor of the U.S. auto industry, Motown was the fourth largest city in the country with a large and growing middle class based on auto-worker wages. There were world-class sports teams, museums and, of course, Motown records where icons such as Diana Ross, Smokey Robinson and Marvin Gaye got their start.
The Motor City had it all. Now there’s nothing left except the sports teams. Two weeks ago, Detroit announced it was filing bankruptcy, the largest government entity in the U.S. to take such a move. But with $18 billion in debt, the city’s unelected manager, Kevyn Orr, appointed by Gov. Rick Snyder, felt bankruptcy was the only way to get out from under such a crushing debt burden.
The sides are being formed. Who will lose the most money: bondholders, who invested with the city on the safe assumption they would get some profit on their investment, or workers who are due pensions after a career in public service? Pensions make up about $3 billion of the debt.
It will be up to a bankruptcy judge to decide, but Orr says he wants to spread the pain. Retired workers are furious about pension cuts and have already filed suit to block the bankruptcy. Retirees claim that any cut to pensions violates Michigan’s constitution. According to the New York Times, the state constitution says contracts between the employees and the government “shall not be diminished or impaired.”
Snyder and Orr think federal bankruptcy will supersede Michigan’s constitution, which surely begs the question of what Michigan’s constitution is actually worth. No, the state constitution should take precedence and retirees’ pensions should be given priority.
In a similar (but smaller) bankruptcy in Central Falls, R.I., a state law gave bondholders preferential treatment, according to the Times.