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Bankruptcy Hurts Autoworkers and It'll Hurt Detroit's Workforce

Detroit's emergency manager will gut the city and destroy the hard-won gains of Detroit public workers and retirees.

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For Frank Joyce, former UAW communications director and Detroit resident, the bankruptcy filing is a welcome development. It offers Detroit an opportunity to "right-size" itself and, more importantly, “brings all the creditors to the table to potentially take some kind of haircut as opposed to year after year of exclusively trying to balance the books on the backs of the residents and retirees.” The provisions of Chapter 9 give municipalities a break from creditor demands while they negotiate a restructuring plan to reduce obligations to creditors such as banks and bondholders. But a bondholder haircut is not guaranteed. In recent municipal bankruptcy cases in Vallejo, CA and Central Falls, RI, bondholders were paid in full (despite a lengthy battle in the former case).

Chapter 9 also enables cities to break executory contracts like collective bargaining agreements. This is particularly appealing for cities with strong unions and large pension obligations. In many states (like Michigan) pension benefits are constitutionally protected, making them virtually unassailable unless workers voluntarily agree to concessions. But once inside bankruptcy the balance of power shifts significantly. Workers and retirees suffered major defeats in the Vallejo and Central Falls cases. In Vallejo, collective bargaining agreements were gutted or rejected outright, and retiree health benefits were slashed. In Central Falls, a third of city jobs were eliminated and retiree pensions were reduced, in some cases by 55 percent.

The use of Chapter 9 to attack worker and retiree gains is a relatively recent development. In Chapter 11 bankruptcy, companies are forced to negotiate a concessionary plan with workers and retirees by Sections 1113 and 1114 of the bankruptcy code. These sections, skimpy as they are, were added to protect workers and retirees by Congress in 1994 in response to outrage over the watershed Bildisco bankruptcy case. But Sections 1113 and 1114 were never added to Chapter 9, giving rise to a legislative no-man’s land for municipal bankruptcies.

When Orange County, California declared bankruptcy in 1994, unions fought the county’s attempt to reject collective bargaining agreements and won. The judge ruled that California law pre-empted federal bankruptcy law, and that Bildisco did not empower municipalities to unilaterally alter their union contracts. But in the 2008 Vallejo bankruptcy case, the judge rejected this logic. He ruled that by allowing municipal bankruptcy, states effectively agree to be bound by federal law, allowing cities the right to break collective bargaining agreements in Chapter 9 bankruptcy even if state law protects workers and retirees.

The Vallejo case set a dangerous precedent and now Detroit workers and retirees find themselves in the same scenario. The practice of destroying collective bargaining agreements and retiree benefits has leapfrogged from Chapter 11 onto Chapter 9. The legal precedent of reducing or eliminating wages, health benefits and pensions for workers and retirees is being cemented with each new municipal bankruptcy. To make matters worse, public pensions are not regulated or protected under the Employment Retirement and Income Security Act, a federal law passed in 1974 that regulates the pensions and health benefit plans of private sector workers. So if Orr and his team succeed in decreasing or eliminating pensions, Detroit public workers can’t turn to the Pension Benefit Guarantee Corporation as many private sector workers have done.

In the coming months all eyes will be on Detroit to see whether a big city, with lots of unions and a complex benefit structure, can use Chapter 9 to reverse worker gains. Gov. Snyder has stacked the deck to make sure this happens. Normally in a Chapter 9 filing, local leaders have considerable power to strike a beneficial deal for the city. Because local leaders are dependent on their constituency to remain in power, they are more willing to listen to stakeholder concerns. But in Detroit’s case the local leadership has been removed from the equation by Snyder’s appointment of Kevyn Orr as emergency manager. Orr has no ties to the city, but under Chapter 9 has absolute power to renegotiate contracts, privatize services, and sell off assets as he and the governor see fit.

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