11 November 2014

Free At Last: Detroit's Bankruptcy Plan Confirmed

As most have heard, bankruptcy judge Steven Rhodes confirmed Detroit's Chapter 9 plan of adjustment. You can read a nice account here. That the plan was confirmed should not surprise my readers. I predicted as much here although I was off in the timing by a week.The New York Times Dealbook has an excellent article about the financial pipe dream of the plan here. In short, one of principal reasons for Detroit's flight to bankruptcy--its underfunded pensions--remains:
But the pension system that the settlement leaves behind has some of the same problems that plunged the city into crisis in the first place — fundamental problems that could also trip up other local governments in the coming years. Like many other public systems, it relies on a funding formula that lags behind the true cost of the pensions, and it is predicated on a forecasted investment return that the judge, Steven W. Rhodes, himself sharply questioned.
I've harped on the issue of the underfunded pension of state and local (and federal, for that matter) governments for years. With some contribution by its retirees, from the state of Michigan, and some big hitters, Detroit's plan has kicked the can of insolvency down the road by a decade or two, but it didn't solve the problem. Of course, no one's going to come knocking the judge's door in 2035 and ask him about it, much less any of the politicos who pushed the case through. Which, come to think of it, is the quintessential American way.

(For some more scholarly analysis, read my article Municipal Bankruptcy: When Doing Less Is Doing Best (download here).

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