Why Mishandling Detroit’s Bankruptcy Trial Could Hasten Other Municipal Bankruptcies

Jean Card Writer and Communications Consultant
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In two weeks, on August 21, in a federal bankruptcy court in Michigan, the trial for the largest municipal bankruptcy case in our nation’s history will begin. By the end of September, a single federal judge — not a jury, not a panel of judges — will hand down a decision that will likely send a ripple effect through our entire country’s economic future. The case will rival, in terms of impact, many Supreme Court decisions. But will America be watching this trial at all?

The bankrupt city, of course, is Detroit — a town whose name makes many Americans want to turn their heads away, unsympathetic to a community that, many believe, brought its financial ruin upon itself.

You may feel that way. You may be muttering something along the lines of “they made their bed” right now. But whether or not we feel any sympathy for the Motor City, all of us should pay attention to how this titanic bankruptcy case is handled and ultimately settled.

You see, Detroit won’t be the last American city to go bankrupt. Not by a long shot. Economist Stephen Moore last year compiled a sobering high-risk list of cities that are in the same type of rock-and-hard-place predicament that comes from massive public employee pension obligations. Adding to the chilling look at those 20 big cities, Moore included a warning to “keep an eye on” the very largest of American cities too, even those that might be considered too big to fail, “like Chicago, Philadelphia and New York.”

More recently, another economist and writer, Megan McArdle, has point-blank speculated that New York could go the way of Detroit based on their future public-employee pension crisis.

Bankruptcy law is designed to encourage a phoenix to rise from the ashes, but it only works well if it is implemented in a way that is truly fair, truly blind justice. In Detroit, the federal judge will have to be fair while looking at two very different groups: public employees who have counted their whole lives on their pensions being real, and large, faceless creditors; the kind of big Wall Street firms that don’t tend to pull on the heartstrings.

We have to be hopeful that the judge will be fair. But, since Detroit’s assets (particularly its art collection, parts of which would have to be sold to be fair to creditors) have been the subject of emotional debate as well, there is a real possibility that his ruling will favor people over creditors.

Here’s where things get economically scary. If the large creditors involved in the Detroit case aren’t treated fairly by the ruling, credit markets for all municipalities — especially those at high risk of bankruptcy — will be chilled immediately. Bankruptcies in other big cities could be hastened.

While any human heart will ache for the people whose pensions are gone, or the closing of an historic local museum, is it right for these elements to be given preference when doing so will likely throw ice water on the credit market for all American cities?

Again, we have to hope and have faith in the judicial branch’s dedication to fairness and impartial implementation of the law. But federal judges are humans, and they are fallible. They need to be held accountable, just like any other public servant. The best way to do this is through the light of public scrutiny. It’s what the Supreme Court must face, and I believe it’s what all judges must be subject to. In fact, the Detroit case’s profound economic implications create a prime example of why it’s time for more public light to be shone on federal court decisions of all kinds. It’s time for all Americans to learn that there is so much more to this powerful branch than the Supreme Court.

Jean Card is a writer and communications consultant living in Washington, D.C. She is a former speechwriter for the U.S. Secretaries of Treasury and Labor as well as the Attorney General.