No doubt yesterday’s decree that pensions can be slashed as part of a bankruptcy filing for the City of Detroit have left some persons gasping for air, wringing their hands and generally caught by surprise that contractual retirement obligations may no longer be sacrosanct. As the result of a historic decision to possibly curtail pension benefits, in hopes of a speedier economic recovery, impacted persons are making a beeline to the court. According to “Judge rules pensions can be cut in Detroit bankruptcy” by Nathan Bomey (Detroit Free Press, December 3, 2013), “Michigan Council 25 of AFSCME, the city’s largest employee union, filed an appeal to the U.S. District Court for the Eastern District of Michigan.” (Note that AFSCME stands for the American Federation of State, County & Municipal Employees.) Their website includes a petition for members to urge that Detroit’s Emergency Manager, Kevyn Orr, resign. Whether their protests and legal appeals stand is yet to be seen. While true that pension obligations are contractual in nature, the Honorable Steven W. Rhodes explained that federal law overrides state law when it comes to a Chapter 9 bankruptcy situation.
Already the West Coasters are abuzz about the possible fallout for cities such as San Bernardino. According to “Bankrupt Detroit can cut pensions; implications big for California” by Dale Kasler (The Sacramento Bee, December 3, 2013), we are likely to see other municipal plans hit the chopping block as a cited solution to saving the whole versus bits and pieces. Schiff Hardin bankruptcy expert, Karol Denniston, is attributed to classifying the Detroit decision as “a wake-up call to everyone who’s been saying this is sacred and you can’t touch it.” I concur with Attorney Denniston that there are likely to be tremendous spillover effects as the result of a continued awareness that the status quo is not sustainable.
Based on my research about risk-taking, disclosure and investment trends (and a related litigation “roadmap”), I predict that there will be numerous legal actions filed against organizations that comprise the municipal bond eco-system, including, but not limited to, underwriters, rating agencies, advisors, mutual fund portfolio managers and actuaries. You may not agree that litigation is the right course of action but it is clear that we have now moved to a new paradigm. Lots of questions will be asked about who knew what and when.