Policy: Entitlements

Michigan attorney general breaks with governor over Detroit pensions

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Michigan Attorney General Bill Schuette told the Wall Street Journal on Sunday he would join a lawsuit seeking to block bankruptcy judges from reducing the pensions of Detroit public employees. That puts him at odds with Governor Rick Snyder, a fellow Republican, who has said such measures are necessary to get the broke city on a sound financial footing.

“We are going to aggressively defend the constitution,” Schuette told the Journal. The Michigan constitution explicitly bars such cuts for public sector workers.

Federal law, however, allows it and the legal question of whether federal or state law is supreme here has yet to be decided in the courts. Schuette will be joining the case on the side of the unions arguing against cuts.

Snyder’s spokeswoman said the governor did not oppose Schuette’s decision, saying “we appreciate and support efforts to get clarity” on the issue.

Detroit’s biggest liability in its bankruptcy is the $11.5 billion (estimates vary) in entitlement payouts it owes retired city workers, a legacy of decades of sweetheart deals between the unions and the elected officials who relied on union votes to get re-elected.

That fact may be the silver lining to the city’s financial woes: Once that  liability is dealt with, the city will be on a much firmer financial footing. And bankruptcy may have been the only way to deal with that.

Until recently, the unions that represent those workers fought any reduction in those plans. But bankruptcy would empower judges to break those contracts. This power will give the state-appointed receivers the leverage to force the unions to table. If the unions resist, their members could theoretically lose everything.

It could also set a precedent that will impact future actions by state and local governments struggling under similar burdens. Detroit is in far worse shape than most, which means it will be a good object lesson.

“Cities and unions across the nation are watching the Detroit case as they are facing similar issues regarding pension and legacy costs. Large, former industrial towns with powerful unions, like Chicago and Philadelphia, now have to make the painful cuts to city services that Detroit made years ago,” Forbes notes.

That is assuming the arguments of people like Schuette and the unions are rejected. Most experts predict Federal law will prevail.

“If anything, this puts the issue out there and facilitates the issue,” Schuette said.

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