THE BLOG
08/06/2013 11:14 am ET Updated Oct 06, 2013

Why We All Should Be Watching Detroit Carefully

Talk of Detroit is all the rage these days, and not because their American League baseball team is far superior to ours.

It's the talk because it's the largest U.S. city to have declared bankruptcy and the rest of the nation should be watching to see how that all turns out.

Every citizen, and especially every citizen who is a public worker, should be following this drama closely.

Chicago is no Detroit. And states like Illinois cannot file for bankruptcy the way cities like Detroit and Stockton, California can.

Let me repeat that for people who keep calling for Illinois bankruptcy: States do not have bankruptcy as a legal option.

Still, what ultimately happens to Detroit's public worker pension system because of the bankruptcy filing could ripple across the lake and around the nation.

Meredith Whitney, a financial analyst and author of "Fate of the States," wrote last week in the Financial Times that Detroit is not alone in its problems and its financial effects on public workers and on bondholders.

"Officials could raise taxes further and cut social services deeper but leaders are finding these once 'go-to' measures to be counterproductive," she wrote.

"There are five more towns like Detroit in Michigan alone. There are many more municipalities across the country in similar positions," (and states, we would add.) "Detroit's decision last week paves the way for other elected or non-elected officials to make decisions to save their cities and towns," Whitney concluded, "decisions that probably involve politically unpopular actions that may secure their long-term viability."

The Wall Street Journal also published an analysis with parallels to Illinois, Chicago and many other communities with pension debt problems.

David Skeel, a bankruptcy law professor at the University of Pennsylvania Law School, noted that immediately following the Detroit filing, a circuit court judge tried to intervene because she was concerned the bankruptcy would alter city workers' pensions in violation of the state constitution.

Sound familiar?

But a federal bankruptcy judge and appellate panel already stayed the circuit judge's orders. Michigan's constitution, like ours, states that pensions are contracts that cannot be "diminished or impaired." But Skeel notes that federal bankruptcy law will supercede the state constitution and argues that the point of bankruptcy powers is to help along the adjustment of debt.

"Chapter 9 requires that a restructuring of obligations be in the best interests of creditors -- including the retirees," Skeel writes. "This suggests that sacrifice must be shared among all of a city's general creditors, bondholders as well as public employees.

"As the pension issue goes, so goes Chapter 9," Skeel continues. "If Detroit can make at least modest adjustments to its pensions, and restructure its other obligations as well, the city and other municipalities in dire financial straits may have a fighting chance," he concludes. "If not, the downward financial spiral of too many American cities is likely to continue."

And what of the chances of the state with the nation's worst pension debt?

The Economist's take on Detroit tosses around some intriguing numbers. Residents there would have to fork over $27,000 each to cover its debt. As we've noted repeatedly, the nonpartisan group, Truth in Accounting, says every taxpayer in Illinois would have to pay $31,600 each to cover our debts right now.

And how's this for a new way to think about our debt? "The hole in Illinois's pension pot is equivalent to 241 percent of its annual tax revenues," the Economist notes in its piece, entitled, "The Unsteady States of America."

Illinois cannot simply ignore its bills forever. Something -- or a lot of someones -- are gonna have to give.

Are you fed up with our Illinois debt? Sign our pension reform petition here.

See more at Reboot Illinois