In Detroit’s bankruptcy, why are contracts with workers a joke?
By DEAN BAKER
The decision by the City of Detroit
to declare bankruptcy came as a shock
to many. Detroit, which was once the
nation’s fifth-biggest city, is by far the
largest government in the United States
ever to declare bankruptcy. While De-
troit has been seeing a falling popula-
tion and worsening finances for five
decades, bankruptcy is still a dramatic
step.
One part of this story that is striking
is the discussion in the media of how
workers’ pensions will fare in bank-
ruptcy. Most articles seem to take it for
granted that pensions will face large
cuts, with some implying that retired
workers may be in the same situation as
unsecured creditors, getting just a few
cents for each dollar owed.
This is striking because Michigan’s
state constitution seems to say as clearly
as possible that pension payments are a
contractual obligation of the state. Arti-
cle IX, Section 24 states:
“The accrued financial benefits of
each pension plan and retirement sys-
tem of the state and its political subdi-
visions shall be a contractual obligation
thereof which shall not be diminished
or impaired thereby.”
That language would seem to put
pensions ahead of bondholders in
claims on the city’s income and assets.
That would mean that bondholders
would only get any money if pension
claims have been honored in full.
If that seems unfair to bondholders,
remember that this provision in the con-
stitution dates back to 1963. Anyone
who lent Detroit money in the subse-
quent five decades presumably could
have read the constitution and recog-
nized that they would be behind retired
workers in claims on the city’s assets in
the event of a bankruptcy.
If they lent the city money knowing
that pensions would have priority, then
they have nothing to complain about. If
bondholders didn’t know that pensions
would have priority, then they should do
more homework before investing their
money in the future.
It is striking that so many people in
the media are acting as though this
clause does not exist. Part of the story
is undoubtedly a belief by many re-
porters that Detroit workers got overly
generous pensions. The pensions of De-
troit’s workers are almost certainly bet-
ter than private sector pensions, which
have been rapidly disappearing. How-
ever, research shows that most public
sector workers incur a wage penalty rel-
ative to private sector workers with the
same education and experience. Better
pensions and other benefits essentially
even the score.
But even if Detroit’s workers got a
good deal with their pay and benefit
package, so what? A contract is still a
contract. Workers put in their time in
exchange for a specific package of pay
and benefits. How can the government
arbitrarily change the terms of the deal
after the fact?
There are businesses that end up get-
ting very good deals from the govern-
ment all the time. How often does a
state or local government end up selling
a parcel of land for a price that turns out
to be hugely below its true value? Or
they may give tax concessions to lure
businesses that prove to be overly gen-
erous. It looks like the City of Chicago
made a really bad deal in leasing its
parking meters to Morgan Stanley for
three quarters of a century. Does
Chicago get to just rewrite the terms of
the contract?
In these cases involving businesses,
somehow a contract is a contract, end
of story. The relationship is sacred, and
no one suggests changing the terms af-
ter the fact. However, in the case of the
pensions for city workers, these are just
office workers, custodians, or garbage
collectors. The media would have us
believe that contracts with these sorts of
people aren’t real contracts. If they
prove inconvenient, then they can be
changed.
While that may be the view that the
media is trying to push, the rest of us
should insist that the law and the con-
stitution be respected. Detroit’s city
workers have as much right to have
their contracts respected as the Wall
Street bankers making millions and bil-
lions off contracts that are often far
more questionable.
This is class war at its ugliest. The
elites have to learn that they don’t get to
change the rules as they go along, if
they want their contracts to be respected
they will have to respect contracts that
protect working people as well.
(Editor’s Note: Dean Baker is the
co-director of the Center for Economic
and Policy Research. He also has a
blog, Beat the Press, where he discusses
the media’s coverage of economic is-
sues.)
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NORTHWEST LABOR PRESS
AUGUST 16, 2013