NYT: Detroit should stiff banks and bondholders but leave public employee unions alone

Classic pretzel logic from the New York Times.

There is no doubt that bankruptcy proceedings will be very painful for Detroit’s population of 700,000. Bankruptcy cases can drag on for years, and city services, which have already been slashed, could deteriorate further.

But the bankruptcy case might also allow Detroit to be relieved of paying back its bondholders and banks much of estimated $9 billion they lent to Detroit on overly rosy assumptions. This group will, of course, push the city and state to also force concessions on city workers and retirees, whose pension funds are underfinanced by about $3.5 billion.

But city officials should resist the idea of cutting the pension payments for the city’s public workers, which averages $19,000 a year. Unlike the situation in other troubled cities where government officials made lavish pension promises and workers gamed the system to inflate their benefits, Detroit’s are quite modest. Moreover, city employees have already had their pay and benefits reduced significantly in recent years. Slashing the meager fixed incomes of retirees will also hurt the city’s weak economy because they are more likely to spend most of the money they receive in local businesses. Labor unions also argue that Michigan’s Constitution protects their pensions from cuts, which will set up a potentially long legal battle that the city can ill afford.

So according to the geniuses at the New York Times, Detroit should use the bankruptcy proceedings to stiff their secured creditors while using up whatever meager resources they still have to keep those unsecured pension and health care benefits flowing undiminished to the public employee unions. Never mind that it was, at least in part, the willingness of the evil banks and bondholders to lend the beleaguered city money that has allowed these lavish benefits to continue as long as they have. It’s a sad testament to the quality of our educational system to see members of the Detroit teachers union demanding the bankruptcy judge punish the very creditors that have made their pay and benefits possible. I thank God these folks aren’t teaching my kids. If the Times and Detroit’s PEUs get their wish, the city will never get back on its feet because future potential lenders would be insane to extend them credit. Why the Times believes this will facilitate a renaissance in Detroit is impossible to understand.

Look at it this way.  Suppose that instead of the Detroit municipal government, it was the U.S. government that had declared bankruptcy.  A situation, I hasten to add, which becomes less implausible with each passing day of the Obama Administration. Anyway, the national equivalent of what the Times is suggesting is that a bankrupt U.S. Treasury should stiff America’s bondholders in order to keep the money flowing to the federal public employee unions.  That would pretty much be the end of the country, but at least those precious public employee unions would get what was overpromised them for a short time longer until the inevitable collapse of the entire system.

And that last bit about Michigan’s constitution protecting public employees from pension cuts means, to quote Mark Steyn, that “in Michigan, reality is unconstitutional”. The Times mentions that Detroit’s pension funds are underfunded by $3.5 billion but neglects to mention the additional $5.7 billion in unfunded retiree health care liabilities. Where will this money come from? Even if it made sense to place the entire burden of bankruptcy on the city’s secured creditors in favor of Detroit’s public employee unions (kind of like Obama did with the auto industry bailout), there still isn’t enough money to pay all these benefits, to say nothing of maintaining city services. It seems reality is as foreign a concept at the Times as it is in Michigan’s state constitution. In the real world all stakeholders, including the Times’ cherished public employee unions, will have to accept a significant haircut if Detroit is to survive. But the Times, evidently, doesn’t reside in the real world.

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