Someday, Detroit’s bankruptcy may well be seen as the start of an era of broken promises.
For years, cities have promised rock-solid pensions without setting aside enough money to pay for them, aided by lax accounting practices, easy borrowing and sometimes the explicit encouragement of labor unions.
Officials were counting on rich investment gains to fill the holes; unions and their retirees were counting on legal provisions — like Michigan’s Constitution — that said pensions were unassailable and that benefits would always be paid, whether through higher taxes or budget cutbacks elsewhere.
But a bankruptcy judge, Steven W. Rhodes, threw a wrench into that thinking on Tuesday, ruling that pension benefits could be reduced in a bankruptcy proceeding. The decision recast the landscape and gave distressed cities leverage to backtrack on their promises.
“Last night, as a public employees’ union leader, you went to bed thinking, ‘My workers’ pensions have special protection; I can continue to play hardball,’ ” Karol K. Denniston, a lawyer with the firm Schiff Hardin who has been advising residents of California cities on fiscal issues, said Tuesday after the judge issued his ruling. “This morning you woke up and found yourself in a new world.”
Public employees’ unions are already fighting back, though not against the chronic underfunding of their benefits. They are fighting the notion that...