Detroit’s fiscal crisis poses the most significant test yet for America’s laws on municipal bankruptcy. The opening skirmishes bear witness to the tangle that the courts will have to unpick.
Already, the issues in dispute make for a daunting list. Bill Schuette, Michigan’s attorney-general, has said that pension benefits are sacrosanct under the state’s constitution, while others reply that bankruptcies are governed by federal law. Holders of so-called “general obligation” bonds argue that these are secured by a pledge to raise taxes and rank ahead of pensions; Kevyn Orr, the city’s emergency manager, says taxes can go no higher, and views the bonds as unsecured debt. These disputes will have profound consequences for Detroit’s creditors and for its resident taxpayers.
The latter group can walk away from the Motor City, which limits the burden it can be made to bear. Indeed, Detroit must lower taxes and improve public services to attract people back. That leaves pensioners and bondholders. Given the scale of the crisis, both groups will inevitably face losses. Clearly, the courts must follow the law. It is to be hoped that the result will be fair, and instructive to others who may be flirting with ruin.