Detroit's bankruptcy filing is making many other municipalities nervous about their unfunded liabilities for retiree pensions and benefits. A drawn-out bankruptcy fight will be a nightmare for politicians who stake their reputations on good governance and successful turnarounds. Government retirees are still a potent political force and will fight in court for what they think they deserve, regardless of the fiscal harm they cause. States will sell assets to settle their debts if public employee unions do not willingly take cuts in promised benefits.
I do not know whether the Michigan State judge's injunction against Detroit for filing bankruptcy will be overturned by a federal court. Bankruptcy law is rarely exercised for municipalities so any new case law will set clear precedents for whatever bankruptcy wave is coming. There is plenty of precedent for one extreme measure that municipalities may consider if their backs are against a fiscal wall. That would be the seizure of private assets under eminent domain whose resale will make municipal bondholders and pension recipients whole.
This nightmare scenario could easily unfold if state and local politicians believe fighting public employee unions in court will harm their re-election prospects. The US Constitution prohibits the government from taking private property without just compensation but legal history leaves the definition of "just compensation" to state and local governments. Consider also that property owners who endure a taking under eminent domain may be compensated in the form of a "condemnation award." I'm not an attorney, but I'm under no impression at present that such an award absolutely must be in the form of cash or in-kind property. My nightmare is that private property owners in Detroit or elsewhere may see their land seized and businesses condemned with their only "just compensation" as some new non-marketable junior security issued by a broke municipality just for such an occasion. The IOU would of course be worthless but the property seized would be sold to other parties (presumably with political connections) and the proceeds used to fund pension liabilities.
Consider also that the people charged with enforcing this confiscatory doctrine - police, judges, government clerks - are all beneficiaries of this process if they depend on defined benefit pensions. Their interests would theoretically align with fulfillment of a strict interpretation of contractual obligations outside of federal bankruptcy proceedings and against the interests of taxpayers and private property owners. Finally, consider that legal precedent also allows the taking of personal property and intangible property. I do not see any legal barrier to the confiscation of privately held liquid investments such as brokerage accounts or bank accounts.
This is a thought piece that I very much want to be invalidated. I truly want Detroit to have a successful restructuring through federal bankruptcy proceedings that are unencumbered by state-level judicial maneuvers. I do not at all look forward to the depressing prospect of desperate politicians, backed up by destitute law enforcement officers and government functionaries, confiscating private assets under eminent domain just to placate some very vocal unions. I want to be wrong about this prospect. I would like bankruptcy attorneys and legal scholars to debate this scenario in the public sphere and prove my concerns to be unfounded.
I do not know whether the Michigan State judge's injunction against Detroit for filing bankruptcy will be overturned by a federal court. Bankruptcy law is rarely exercised for municipalities so any new case law will set clear precedents for whatever bankruptcy wave is coming. There is plenty of precedent for one extreme measure that municipalities may consider if their backs are against a fiscal wall. That would be the seizure of private assets under eminent domain whose resale will make municipal bondholders and pension recipients whole.
This nightmare scenario could easily unfold if state and local politicians believe fighting public employee unions in court will harm their re-election prospects. The US Constitution prohibits the government from taking private property without just compensation but legal history leaves the definition of "just compensation" to state and local governments. Consider also that property owners who endure a taking under eminent domain may be compensated in the form of a "condemnation award." I'm not an attorney, but I'm under no impression at present that such an award absolutely must be in the form of cash or in-kind property. My nightmare is that private property owners in Detroit or elsewhere may see their land seized and businesses condemned with their only "just compensation" as some new non-marketable junior security issued by a broke municipality just for such an occasion. The IOU would of course be worthless but the property seized would be sold to other parties (presumably with political connections) and the proceeds used to fund pension liabilities.
Consider also that the people charged with enforcing this confiscatory doctrine - police, judges, government clerks - are all beneficiaries of this process if they depend on defined benefit pensions. Their interests would theoretically align with fulfillment of a strict interpretation of contractual obligations outside of federal bankruptcy proceedings and against the interests of taxpayers and private property owners. Finally, consider that legal precedent also allows the taking of personal property and intangible property. I do not see any legal barrier to the confiscation of privately held liquid investments such as brokerage accounts or bank accounts.
This is a thought piece that I very much want to be invalidated. I truly want Detroit to have a successful restructuring through federal bankruptcy proceedings that are unencumbered by state-level judicial maneuvers. I do not at all look forward to the depressing prospect of desperate politicians, backed up by destitute law enforcement officers and government functionaries, confiscating private assets under eminent domain just to placate some very vocal unions. I want to be wrong about this prospect. I would like bankruptcy attorneys and legal scholars to debate this scenario in the public sphere and prove my concerns to be unfounded.
