Shikha Dalmia in Bloomberg View on Why Constitutional Protections Won't Mean Diddly for Detroit's Labor Unions in Bankruptcy

A federal judge yesterday threw out multiple union lawsuits challenging the constitutionality of Detroit's bankruptcy filing and declared his courtroom the exclusive venue for future proceedings. This is a setback for the unions' legal argument that the filing violates the state constitution in not holding their pension benefits harmless. It is also a strategic setback because they no longer have the option for shopping around for friendly judges who they have helped elect to state courts.

Writes Reason Foundation Senior Analyst Shikha Dalmia in Bloomberg View:

Any way you look at it, unions have to accept the cold reality that their city is broke. At best they can use their constitutional protections to squeeze a marginally better deal in bankruptcy court -- not keep it out of that court. Furthermore, there is no way they can preserve all the promises to their retirees…

[T]he lesson from Detroit so far is that these protections are not worth a lot when a city, having systematically mismanaged its finances, is flat broke.

Go here for the whole thing.

Comments

[Paul.]

This is a setback for the unions' legal argument that the filing violates the state constitution in not holding their pension benefits harmless.

Wait, what? Are there states with constitutional provisions that say that this or that type of spending shall be deemed harmless, no matter the level, amount or kind?

Could one of the Hit Und Run Sharks please weigh in here?

[Sevo]

"Public pensions are protected in Constitution"
http://articles.latimes.com/20.....s-20111114

[Invisible Finger]

Basically, yes.

Illinois public employees staged a MASSIVE disinformation campaign to prevent a constitutional convention because they know this lunacy would be the first thing to get expunged from the current constitution.

[Sevo]

Wanna bet that ol' dusty piece of paper suddenly gets transcribed to the most modern form of data document?

[Paul.]

Are they using "harmless" as a euphemism for 'untouchable'? I mean, untouchable is more honest. But using the phrase 'harmless' is just bullshit.

[Bo Cara Esq.]

To 'hold harmless' is a legal term. I've seen it used in contracts to mean that one party assumes all liability inherent in a situation, I imagine in this situation it means to protect from being diminished in bankruptcy proceedings.

[Paul.]

I mean, if I pay my cleaning lady (if I had a cleaning lady-- and if I did have one, she'd be hot) $1,000,000 a year, I can't exactly call that portion of my spending 'harmless'.

[Episiarch]

Frank: Charlie, I need a woman.

Charlie: OK.

Frank: I need a woman to...to cook for me and clean up after me and somebody who'll do everything I say.

Charlie: Well, that?-that's just a maid. You want a maid?

Frank: Yeah, that's right, a maid. A maid I can bang.

[Aloysious]

A Man Needs A Maid.

/Neil Young

[R C Dean]

At best, that provision prohibits the state (or its minions at the counties or cities) from cutting their pensions.

Its not binding on a federal bankruptcy court applying federal law. Federal law trumps state law. I mean, this isn't even a hard one.

[Bo Cara Esq.]

Is it that easy? I thought Chapter 9 itself allows a municipality to file only if it is authorized to do so under state law?

[R C Dean]

Probably, but that just means that the municipality doesn't have the authority to file unless state law provides it. Makes sense: municipalities have only those powers delegated to them by the state.

Once you get into federal court, though, the governing law is federal bankruptcy law. And under that law, pensions are basically unsecured creditors, subject to reduction, cramdown, and all the rest.

[Bo Cara Esq.]

I guess the issue then would be would the filing for bankruptcy be something that would be forbidden by state law because it might or likely would lead to the diminishment of the pension debt.

It seems to me the federal court would have a duty to ask the state Supreme Court to rule on whether the filing would be authorized or prohibited by state law.

[Sevo]

Bo Cara Esq.| 7.25.13 @ 7:30PM |#
"I guess the issue then would be would the filing for bankruptcy be something that would be forbidden by state law because it might or likely would lead to the diminishment of the pension debt."

If I read it correctly, that was exactly the claim of the state Judge, which seemed to have lasted 2 or 3 minutes before the federal judge said (per RCD) "Its not binding on a federal bankruptcy court applying federal law. Federal law trumps state law. I mean, this isn't even a hard one."

[Bo Cara Esq.]

Does that sound like the right conclusion to you? If chapter 9 (which is federal law) expressly stipulates no municipality can file contrary to state law it would seem that just citing the Supremacy Clause doesn't settle the matter.

[Sevo]

"If chapter 9 (which is federal law) expressly stipulates no municipality can file contrary to state law..."

If that is the case (and I'm not disputing it, just pointing out my ignorance), then is would not be so easy.
Are you sure it does? The federal judge pretty much laughed at the state judge, and echoed RCD's claim about 'easy'.

[Bo Cara Esq.]

Here's the relevant legal provision:

An entity may be a debtor under chapter 9 of this title if and only if such entity?
(1) is a municipality;

(2) is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law

http://www.law.cornell.edu/uscode/text/11/109

I've yet to take bankruptcy law so I can't comment on whether the union's reading of that provision has more to it than the Federal judge found, but it seems odd that they wouldn't take a state judge's interpretation of whether state law authorized this filing.

[Invisible Finger]

I am not a scum-, er, lawyer, but this part:

is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law

sounds to me like the subject is whether or not the municipality is allowed by State law to have debts. IOW, if the debts are illegal, then the federal law isn't going to let the municipality get out from under their State crime of being in debt.

[Invisible Finger]

Most of these people are on fixed incomes

As opposed to most people in the country that, when they retire, will have NO income and will have to live off their savings.

You're on a fixed income? Stop rubbing your prosperity in my face.

[R C Dean]

Most of these people are on fixed incomes

Yeah, and?

News flash: I'm on a fixed income. Its called a "salary." Its an income, a its the same amount every month, so its fixed, right?

What's so magical about a "fixed income" that we're supposed to start blubbering and emptying our wallets?

[Paul.]

My income is 'fixed' alright.

[Invisible Finger]

If a person has a complaint with his "fixed income", his complaint should be taken to Ben Bernanke and no one else.

[Hyperion]

Because, they're ain't no more fucking money!

[Invisible Finger]

Can't Detroit just create a pension lottery where every pensioner is paid in scratch-offs? I realize that might be more physical activity than most of them performed on their jobs, but at least they have a chance of getting paid in full.

[Bo Cara Esq.]

A friend of mine joked they should simply reimburse them with vouchers redeemable at the next Super Bowl the Lions are in.

[R C Dean]

Why won't constitutional protections mean diddly?

Because you can't make math illegal, that's why.

[Gojira]

I'm confused as to why M. Dalmia is involved in this topic. How does it relate to GOP anti-immigration stances?

[Almanian!]

*glares at Jimbo*

Please - let it rest for just one post.

[ant1sthenes]

In case there is some slight bit of your comment that was not sarcastic, I believe she is or was living in the vicinity of Detroit.

[PapayaSF]

+1. Ah, but you haven't gotten to part two of her article: How millions of poor Mexican peasants can save Detroit.

[Agammamon]

The first thing those poor Mexican immigrants could do would be to build a wall around city hall and every union office and city department.

Then maybe Detroit can get a reprieve from the blood-suckers so it can build up its strength again.

[The Last American Hero]

I think the Unions were just hoping the Chosen One would come in, disregard bankruptcy law, give them the remaining assets of the city and tell everyone else to fuck off like he did during the auto bailouts.

[Agammamon]

I think I would laugh if he did that. There's nothing the unions would hate worse than to be told "here's some assets, figure out how to make money off 'em". They'd much rather he bailed the city out, then they could leach their cut and still be able to blame someone else when Detroit fails again.

The other route would involve actual work.

[Bo Cara Esq.]

I'm no fan of most union contracts with governments, but I for one think it's terrible that people that were promised certain pensions and counted on those pensions in planning their retirements are going to have those promises 'welched' on because of corruption and mismanagement by their municipal government. I think rather than laughing at such people when they are down in order to kick the unions we should focus on the incredibly incompetent and corrupt government officials who put all those people in this position.

[R C Dean]

Yeah, it sucks, but their recourse should be against the city and the union (definitely including the responsible individuals), which co-conspired to create this unsustainable pension scheme. As long as your indictment of the corrupt and incompetent includes the unions, I'm on board.

The pensioners hands aren't entirely clean, either. They were willing participants in a fundamentally corrupt arrangement that was doomed to collapse. I don't really hold them responsible, but I don't feel particularly bad for them, either.

[Bo Cara Esq.]

I doubt most pensioners had much say in what the union and municipality agreed to, those organizations are usually democratic more in theory than in practice.

I'm still not sure I'd even blame the unions. Like any party the city was doing business with they probably tried to strike bargains good for them counting on the municipality to manage its funds and fulfill obligations they got into.

I saw a list of Detroit's creditors here on Hit and Run the other day, but it did not list or rank them by how much each was owed. I'd like to see such a list.

[Jordan]

Like any party the city was doing business with they probably tried to strike bargains good for them counting on the municipality to manage its funds and fulfill obligations they got into.

In other words, they deserve every bit of blame they get. They had a seat at the bargaining table.

[Bo Cara Esq.]

Let's say the city undertook extravagant 'public works' programs paid for by borrowing money from Bank X. The city was terribly managed and found it could not pay back Bank X. So Bank X has to get a fraction of the debt owed it.

Would you blame the bank? I'd see them as the victim (though if they kept making such loans when it was apparent the city was spiraling to a place they could not repay I'd call them foolish).

[Jordan]

If Bank X loaned them an obviously untenable amount, then yes, I would blame them. And if they wanted to put a gun to the head of taxpayers to force them to cough it up no matter what, then yes I would blame them.

[Bo Cara Esq.]

That seems like blaming a guy who got robbed because he walked drunk down a known bad alley.

[Sevo]

"That seems like blaming a guy who got robbed because he walked drunk down a known bad alley."
Yes, and the guy deserves to be blamed. It does not excuse the robber to do so; the robbery is still illegal.

[Libertymike]

What about walking sober down a known bad alley?

For moi, less sympathy.

[Bo Cara Esq.]

OK, I found such a list. By far the creditors are public employee pensions. That certainly makes me feel less sorry there.

Here's the list:

http://www.freep.com/article/2.....-creditors

[Invisible Finger]

I doubt most pensioners had much say in what the union and municipality agreed to,

then why did they sign up for such a deal?

[ant1sthenes]

Basically, they're the equivalent of someone about to lose their ass due to being in the middle of a pyramid scheme, with tax payers at the bottom, and union officials and politicians at the top. You can feel kind of bad, but not too much.

[Anonymous Coward]

I think rather than laughing at such people when they are down in order to kick the unions we should focus on the incredibly incompetent and corrupt government officials who put all those people in this position.

The Detroitonianshireans made their bed when they made that crooked fuck Coleman Young King-for-Life.

I have no sympathy for them.

[Bo Cara Esq.]

How many pensioners were Detroit voters? I'd guess a significant amount lived in surrounding suburbs and didn't/couldn't vote for the crooks who destroyed the city. I certainly feel sorry for them.

[Anonymous Coward]

Pensions for government workers. They had no problem with the arrangement when everyone was riding high. Now that the shit has hit the fan, suddenly I'm supposed to feel sorry for them? I should wring my hands if they get turned out into the streets? After years of feeding at the public trough and lording it over the taxpayers I should give a shit about them?

Absolutely not.

[Bo Cara Esq.]

Let's say a government contracts with some big construction firm. It signs huge contracts with the firm, which then relies on the revenue forthcoming in hiring new workers and giving them all raises. If the government cannot honor those contracts due to mismanagement and as a result many of those workers lose their jobs and/or raises, then I'm not sure they are the bad guys.

[Bo Cara Esq.]

I'm not just pulling this from nowhere by the way. In the early days of our Republic many creditors were treated poorly on the argument that it was really their fault for getting their debtors, often 'poor veterans of the Revolutionary war' or such, into debt 'they should have known the debtors could not pay.' This occurred during the Great Depression: leftists said that evil banks loaned money to farmers knowing they could not pay them back and so they didn't deserve to have the full debt repaid to them.

[Sevo]

"This occurred during the Great Depression: leftists said that evil banks loaned money to farmers knowing they could not pay them back and so they didn't deserve to have the full debt repaid to them."

Disregarding the lefty aversion to profit, I'm not seeing a problem here.
X loans money at Y rate, which rate is determined to a great degree by the risk involved.
If X doesn't get full repayment from a risky loan, I'm not overly sympathetic.

[Anonymous Coward]

This occurred during the Great Depression: leftists said that evil banks loaned money to farmers knowing they could not pay them back and so they didn't deserve to have the full debt repaid to them.

You should know that despite what Progressives think about the law, that if one party to a contract carries out the essential terms required of them, the second party can and should be liable for their essential terms, regardless of how much "BUT THAT'S NOT FAAAAIIIRRRR!" wailing is done after the fact.

[Bo Cara Esq.]

But this would seem to require you to be far more sympathetic to the pensioners here. They carried out their part of their contract with the city, and now the city is wailing 'but it's not faaaaiiirr!' to a bankruptcy judge asking it to discharge it from some portion of its obligations in return.

[Sevo]

Bo Cara Esq.| 7.25.13 @ 8:32PM |#
"But this would seem to require you to be far more sympathetic to the pensioners here. They carried out their part of their contract with the city, and now the city is wailing 'but it's not faaaaiiirr!' to a bankruptcy judge..."

I don't think this was directed at me, but disagreed.
'Fair' has nothing to do with it; the excessive promises to the unions by those who were elected by the unions ran the city out of money.
There was no lack of warning; the unions are in the same boat as the bank that made risky loans.

[Anonymous Coward]

But this would seem to require you to be far more sympathetic to the pensioners here. They carried out their part of their contract with the city, and now the city is wailing 'but it's not faaaaiiirr!' to a bankruptcy judge asking it to discharge it from some portion of its obligations in return.

Bankruptcy is what you're supposed to do when you are unable to pay. As much as I might enjoy the thought of throwing politicians into debtor's prisons, I prefer the bankruptcy system. And if Detroit can't reorganize, they should start selling off assets on the courthouse steps to make good their debts.

[Libertymike]

How about a good deal of the men at the constitutional convention? Most either held worthless war bonds or represented those that did. The proponents of the constitution insisted upon the debt they were holding to be socialized.

Just because a debtor goes under does not mean that the NAP should be violated so that creditors can be paid.

[Anonymous Coward]

But this isn't some big construction firm. The blood and ink being spilled is done on behalf of city workers, some of whom were in the thick of Coleman Young's reign and who served the most recent crook and killer of stripper/prostitutes, Kwame Kilpatrick. Private firms could sue the government for the amount owed.

Smart business is to always get half up front, and the balance on completion.

[Libertymike]

Especially when you have already learned the hard way.

[Hash Brown]

Do you think it's any different when a private employer that provides a pension for its former employees declares bankruptcy?

[Agammamon]

I think that anyone who relies on a union, known for corruption, to get their pension from a city government, known for corruption, deserves what they get.

How many of those union workers complained that their sweet paycheck and bennies was exsanguinating the city they depend on? Instead they kept electing the same cronies, expecting them to fleece the non-union citizen's of Detroit to line *their* pockets.

Fuck 'em.

[Gilbert Martin]

"but I for one think it's terrible that people that were promised certain pensions and counted on those pensions in planning their retirements are going to have those promises 'welched' on because of corruption and mismanagement by their municipal government. "

How are they any MORE deserving of having their claims protected than the bondholders who lent money to the city?

[Concerned Citizen]

^ Word

[MappRapp]

Here we go dude, one more time man.

http://www.GotMy-Anon.tk

[Dunphy (the real one)]

"I'm no fan of most union contracts with governments, but I for one think it's terrible that people that were promised certain pensions and counted on those pensions in planning their retirements are going to have those promises 'welched' on because of corruption and mismanagement by their municipal government. I think rather than laughing at such people when they are down in order to kick the unions we should focus on the incredibly incompetent and corrupt government officials who put all those people in this position."

As a union member myself (we pay a decent %age in to our retirement fund), I agree.

Otoh, I max out my deferred comp precisely because I want something else I can rely on apart from my pension

WA pension system is actually (i've posted the #'s before) pretty damn solvent with a fair amount of surplus to account for some suckitude in the markets etc. but it's hardly a sure thing

[Bo Cara Esq.]

-The elephant in the room here is race.

I don't know about that, Boise filed for bankruptcy not long ago and it's 90% white. Mismanagement and corruption leading to municipal ruin doesn't seem the sole province of any racial group.

[Sevo]

GWIA?| 7.25.13 @ 7:18PM |#
"The elephant in the room here is race. The White flight from Detroit, its miserable state, and now its bankruptcy was exactly what yesterday's "racists" predicted would happen after forced integration."

Murkin, is that you?

[Anonymous Coward]

This is true. Corruption tends to be universal. Hell, I posted a story for the late nighters about how you can't even see a doctor in China unless you bribe them.

But Detroit is in the state it's in because trade unionists like Coleman Young were allowed to seize power on a platform of Hopes, and Dreams, and Other People's Money.

[Bo Cara Esq.]

I just don't think Detroit is any more corrupt than New York City or Boston. It's just their economy and tax base dried up. I want to say their high taxes and regulatory burden would be the cause, but NYC has that in spades. So I imagine its the cause of the economic troubles of the automotive industry there (which is significantly attributable to the higher union labor costs that existed there) and crime. Detroit crime was quite high, appreciably higher than in NYC or Boston (according to Wikipedia its 2011 violent crime rate was over 3 times that of NYC). And nothing drives the tax base down worse than high crime.

[Jordan]

Given the number of Detroit public officials in prison or under investigation, I'm not so sure about that.

[ant1sthenes]

"I just don't think Detroit is any more corrupt than New York City or Boston. It's just their economy and tax base dried up."

I think it probably is, but regardless, the sort of diseases that a healthy organism can shrug off will kill a malnourished creature. It could be the case that both the corruption and the decline killed Detroit together.

[Anonymous Coward]

But why is the crime in Detroit higher? Could it have something to do with Hizzoner Young hamstringing the cops from investigating violent crimes because any time a white cop investigates a black man = RACISM?

[Bo Cara Esq.]

You're absolutely correct, mea culpa! Still, it's certainly a mostly white municipality that filed for bankruptcy.
But I hope you'll allow me though to simply offer Orange County, CA as another counterexample.

[PapayaSF]

Whoever it is, he has a point. Detroit was a very racist city for a long time, but with the '67 riots and Coleman Young the city became very self-consciously pro-black and anti-white. The black Democrats in charge got what they wanted, total control and a very black-majority city, and the result does look uncomfortably like what a white racist would have predicted.

Other Detroit tidbits:

- The high taxes started under Mayor Cavanagh, a white Democrat.

- Coleman Young has been identified as a secret member of the CPUSA circa the late '40s.

- Hamtramck ("ham-TRAM-ick"), a city totally within the Detroit city limits, used to be the largest concentration of Poles outside Poland. (90% Polish origin in 1970, but only 14.5% in 2010.) When I was a kid some TV commercials included a bit of spoken Polish, and I still remember part of a phone number in Polish for some car dealer who used to advertise during Saturday morning cartoons.