Will a Detroit judge’s green light to bankruptcy result in red lights for pension debt elsewhere, including Oklahoma?
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Published: 04-Dec-2013

OKLAHOMA CITY – A judicial decision in Detroit gives a green light to officials in the troubled city to continue bankruptcy proceedings, and clarified that government pension debt will be part of any settlement of government debt obligations.

The ruling puts in the place the equivalent of a red light for some mounting pension debt, but a trio of Oklahoma officials carefully calibrated their response to Tuesday’s decision, saying its direct impact may be limited.

Presiding over the largest municipal bankruptcy in American history, Judge Stephen Rhodes said Detroit’s emergency manager Kevyn Orr “did mislead the public about the status of pensions,” but that nonetheless pension debt can be included in the vagaries of the process.

However, he also warned city lawyers he would not “lightly or casually” approve cuts to pension obligations.

Tuesday night, leaders of the Oklahoma Public Employees Association, which represents thousands of state government workers, had not responded to a request for comment on the Detroit ruling. 

Oklahoma Auditor and Inspector Gary Jones, a member of the state Pension Oversight Commission, commented the Detroit decision “is kind of a big deal, but it might not directly effect us in Oklahoma. Wisconsin was able to redo its pension obligations because their constitutional provisions permitted that.” In Oklahoma, despite recent reforms, “the underlying pension is considered a property right.”

Jones continued, “Judge Rhodes’ decision certainly makes the case that public officials all over the country need to address pension issues. I’m concerned that part of what’s upcoming is there will be some looking for an opportunity simply to get rid of debt through bankruptcy, without trying to make changes that will meet the obligation to employees.”

Oklahoma Commissioner of Labor Mark Costello told Oklahoma Watchdog, “Chapter 9 permits reckless borrowers to go bankrupt. A direct result of this decision may be that lenders will be much more cautious in the future about making loans to places like Puerto Rico and Detroit.

“The next big shoe to drop may be Puerto Rico. They have a population similar to Oklahoma’s, yet $100 billion worth of debt. A lot of that debt is due to corporate welfare schemes of one form or another.

“People in many places may vote with their feet, as they've already done in Detroit. People have a right to flee economic wastelands.”

John Estus, spokesman for the state Office of Management and Enterprise Services, formerly the Office of State Finance, told Oklahoma Watchdog, “Detroit’s bankruptcy has been a largely unprecedented event from day one, and this latest ruling surely gives pause to any entity with significant unfunded pension liabilities.”

In Detroit, Judge Rhodes’ written opinion, and comments during his presentation Tuesday morning, evoked the city’s storied past as home of American automobile production, but also listed a long catalogue of problems related to debt, collapse of housing stock, poor public services and declining population.

News reports state the local population peaked at 1.8 million in 1950, and is around 800,000 today. 

Government health insurance cuts and pension reductions are each under consideration in Detroit, which has $18 billion in long-term liabilities. Local officials estimate the funding gap for the city’s pension system at approximately $3.5 billion, much larger than first believed. 

Government employee union leaders there have asserted the pension system is fully-funded, but a national analyst, Andrew Biggs of the American Enterprise Institute (AEI) contends the system is only half funded

Biggs defended Judge Rhodes’ decision in a Tuesday post. While he expects public employees to fare better than many creditors or bond-holders in the process, Biggs said Michigan’s constitution provisions mean that while pensions cannot be cut arbitrarily, “bankruptcy is by definition a legal procedure by which contracts can legally be broken.”

Before the city’s bankruptcy filing in July, about 40 cents of each incoming tax dollar was allocated to debt, and projected to rise to 65 cents in the next few years. 

In Oklahoma a fiscal policy analyst carefully applauded the Detroit ruling.

“The news that Detroit can file for bankruptcy is a sign that at least to some degree, math and reality will be involved in determining the future of Detroit. Detroit has made unreasonable pension promises it cannot meet, has spent wildly and ignorantly, and is an example of what happens when government is not properly limited,” said Jonathan Small, policy vice president for the Oklahoma Council of Public Affairs, which advocates free market policies. 

Small concluded, “The story of Detroit is a warning to Oklahoma policy makers that Oklahoma can no longer kick the can down the road. Oklahoma must implement necessary, fundamental pension reform.” 

He advocates a defined contribution plan (in contrast to the defined benefit structure that characterizes most public pension programs in the U.S.) for all new employees covered in the state’s largest government pension. 

You may contact Pat at Patrick@capitolbeatok.com

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