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No Bailout for Detroit

Blight in the shadow of downtown Detroit.

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President Obama may have no wish to think about Detroit, but Detroit is thinking about President Obama. Ingham County judge Rosemarie Aquilina has attempted to block the city’s filing for protection under Chapter 9 of the federal bankruptcy code, accusing Michigan governor Rick Snyder and city emergency manager Kevyn Orr of “cheating good people who work” and—this is kind of outrageous—of “not honoring the president” and his bailout of Detroit’s automakers. It is far from obvious that a county judge in Michigan has the jurisdiction to block federal bankruptcy proceedings, or that “honoring the president” is a legitimate legal standard to apply to a municipal bankruptcy case. But if you are looking for the kind of political careerism and posturing that helped put Detroit in the tank, take a good long gander at Judge Aquilina’s little sermonette.

Steve Rattner, the Wall Street operator and Obama-administration car czar who in 2010 agreed to pay $10 million to settle a corruption-and-kickbacks case in New York, has called on the Obama administration to step in and bail out Detroit, which is in hock to the tune of billions of dollars in benefits promised to its public-sector unions. It is interesting that Mr. Rattner would weigh in on the question of public-sector pensions: As part of his settlement, he is legally barred from appearing in any capacity before any public pension fund in the state of New York.

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Michigan law prohibits the reduction of benefits for government retirees. Detroit does not have the money to make good on its promised benefits, or anything close to the necessary resources. When a legal mandate meets a financial impossibility, that is precisely why we have a federal law on the books for city bankruptcies. We should let the legal system work, something we assume will include the reversal of Judge Aquilina’s ruling.

When a Democrat-dominated city or state government sits across the table from its public-sector union reps, there is no adversarial party in the negotiations. Public-sector paychecks have grown, and the unions’ support for the Democratic party has grown in tandem. But shame is still a force to be reckoned with in politics, so rather than pump up the cash value of public-sector paychecks, governments deferred a great deal of that compensation, pushing it down the road in the form of extraordinarily generous pensions and other retirement benefits. Cities such as Detroit have simply promised more in retiree benefits than they have the ability to fund through taxes, even if taxes were raised to their highest plausible levels and basic municipal services radically pared back.

Detroit is not the only city in this situation—indeed, there are whole states in similar straits. The question is: Which precedent do we intend to set? A precedent of bailouts for profligate politicians and their clients, or a precedent that says when the political class promises generous benefits to itself, those promises have to be conditioned by economic reality? The answer is obvious.

The corruption and incompetence of Detroit are such that the city does not have to be made an example of—it is making an example of itself. All that is required of Washington is to let the federal courts work. Nobody is likely to get out of this unscathed: not government pensioners, not bondholders, not unsecured creditors, not secured creditors. There will be plenty of pain to go around, and the agency best suited to divvying it up is a federal bankruptcy court.



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