Staring their Engines in the Motor City. Almost before Judge Rhodes had completed his oral summary finding Detroit eligible for federal bankruptcy protection yesterday, the Michigan Council 25 of AFSCME filed a notice of appeal. Other unions and pension fund representatives are also considering appeals. But the appeals cannot halt the next stage—putting together a so-called plan of adjustment—which will be Emergency Manager Kevyn Orr’s proposal to pay off only a portion of its $18 billion in debts and to restore essential services, like streetlights, to tolerable levels. Mr. Orr yesterday said he intended to file the city’s formal blueprint by the first week of January—stating, in what surely is an incredible understatement: “We have some heavy work ahead of us.” The process of creating the plan, moreover, will come at a critical juncture for the Motor City—with Mayor Dave Bing leaving office at the end of this year, and Mayor-elect Mike Duggan preparing to take over.
But Judge Rhodes’ decision will have ramifications that extend far beyond Detroit. In making clear yesterday that federal law trumps the Michigan state constitution’s protection of vested pensions—and, therefore, that pensions could not be treated differently from other unsecured debt―the decision sent shock waves across the nation―especially to California, where a similar state constitutional provision has been center stage in the municipal bankruptcy proceedings in San Bernardino. There can be little question but that like the “shot heard round the world,” yesterday’s decision will forever change the nature of pension negotiations in cities and counties. Indeed, the decision could streak across the Rocky Mountains into the Southern California city of Desert Hot Springs, where what the city claims to be unaffordable pension costs might drive the city back into municipal bankruptcy. As well, the decision could ricochet into the City of Stockton’s bankruptcy, where several creditors could challenge that city’s plan of adjustment for not including any haircut for the California Public Employees’ Retirement System. One holdout in the so-far negotiated settlements, Franklin Templeton Investments, a mutual fund company that holds about $35 million worth of Stockton’s bonds—which under released court filings, under Stockton’s plan of adjustment, is scheduled to receive less than a penny on the dollar for its bankruptcy claims, is almost certain to challenge Stockton’s plan as inequitable, claiming that no plan could be “fair and equitable” if CalPERS were paid in full while Franklin received less than a cent on the dollar. “Their argument just got strengthened,” said Karol K. Denniston, a bankruptcy lawyer at Schiff Hardin in San Francisco who has been advising a taxpayers group that formed after Stockton declared bankruptcy. Referring to the judge’s decision in Detroit, she said, “Franklin Templeton is going to have a lot to say about this ruling.” Similarly, in San Bernardino, U.S. Bankruptcy Judge Meredith Jury’s refusal to grant CalPERS an expedited appeal to the United States Court of Appeals for the Ninth Circuit would appear to be strengthened.