Bankruptcy Hurts Autoworkers and It'll Hurt Detroit's Workforce
Kevyn Orr wants to give Detroit a fresh start, and he seems like just the guy to do it. Orr took Chrysler through bankruptcy in 2009 and look how well the company is doing now. If Chrysler and General Motors can do it, Detroit can too, right? This is what the people in charge are telling us anyway. That’s why Gov. Rick Snyder appointed Orr as emergency manager—to work his magic on Detroit like he did on Chrysler. And he will work his magic. Orr and his team of lawyers will gut the city, destroying the hard-won gains of Detroit public workers and retirees, just like Obama’s “Team Auto” reversed decades of autoworker gains.
We tend to look past this part of the Treasury-led restructuring of GM and Chrysler because the auto industry is doing so well these days. Recent estimates put North American output at 16 million vehicles in 2013, with U.S. autoworkers producing the lion’s share. Ford, GM, and Chrysler plants are running year-round to meet demand; for the second summer in a row U.S. automakers are shortening, and in some cases foregoing, their annual summer shutdown so they can pump out more cars and trucks. Profits and share prices are up and executives are riding high.
Industry experts say the turnaround was possible because the crisis forced the auto companies to change, to make a fresh start. The Detroit 3 certainly have reduced their break-even point through plant closures and cost-cutting but they’re doing pretty much the same thing they were doing before the crisis. All three automakers remain completely dependent on large trucks and SUVs rather than smaller, more energy-efficient cars Ninety percent of Ford’s profits came from its F-series pickups in 2012, while GM drew two-thirds of its earnings from the Silverado and the Sierra.
But in terms of the automakers’ agreements with their workers, the restructuring was a bit like starting over. The crisis erased nearly all the gains made by hourly workers in the past four decades. New second-tier workers are paid half the wage of older workers and receive significantly reduced health and pension benefits. And Tier 2 autoworkers aren’t even at the bottom of the post-bankruptcy pay scale. The restructuring paved the way for the normalization and extension of temporary and contract jobs which pay significantly less than Tier 2 jobs and offer no health or pension benefits. As the Detroit 3 run their plants pedal to the metal, temporary and contract workers are the ones being hired.
Everyone agrees that the recovery of the auto industry is a good thing. But before we hold up the auto restructuring and bankruptcy as a model for Detroit to aspire to, we should be honest about what bankruptcy means for workers. Bankruptcy is not a neutral market mechanism. Bankruptcy is an integral component of the modern-day corporate arsenal that is routinely used to reduce or eliminate long-held worker and retiree gains. Detroit’s filing—the latest in a flurry of Chapter 9 municipal bankruptcies—shows that city leaders have begun adding it to their arsenal as well.
Until recently Chapter 9 bankruptcy was chiefly used by extremely small towns experiencing freak financial disasters, like Reed Springs, Missouri (pop. 510), which went broke in 2002 over a $160,000 personal injury lawsuit. City leaders tend to worry that the whiff of failure that emanates from bankruptcy will dissuade investors, drive away residents, frighten the bond markets, and increase the cost of credit.
Bankruptcy used to be a scarlet letter for companies, too. But since the 1990s, the stigma of Chapter 11 has declined dramatically. Today firms are regularly advised to "go through the rinse" to reduce costs and restructure operations. Now urban leaders are taking a second look at Chapter 9, especially as cities across the country struggle to cope with operating deficits brought on, or exacerbated by the Great Recession. Budget shortfalls have pushed one in seven U.S. towns to cut public safety services, and many scholars predict a significant increase in municipal bankruptcies.
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.
At Orr’s press conference the day of the bankruptcy filing, he stood behind a podium draped with a banner that read "Reinventing Detroit," as he discussed the necessity of reducing Detroit’s debt. Chapter 9 will almost certainly cut Detroit’s debt, particularly if it manages to reduce obligations to bondholders and workers. Detroit might even raise some cash in the process by selling its magnificent art collection and privatizing services—perhaps enough to pay off the $450 million bond issued for the new Red Wings arena. But Chapter 9 won’t reinvent Detroit. Chapter 9 is a tool for cutting, not for rehabilitation. After all is said and done, the bankruptcy will do nothing to resolve the long-term, structural problems of Detroit (and dozens of other cities) caused by suburbanization, de-industrialization and this country’s history of structural racism.
All is not lost. Contrary to popular perceptions of bankruptcy as a straightforward, cut-and-dry process, bankruptcy court is a political arena where bullying and coercion often rule the day. While the trajectory of recent Chapter 9 cases bodes ill for Detroit workers, very little case law exists for municipal bankruptcy. The rules of the game are not yet fixed, and what Detroit workers and retirees do inside, and outside, of bankruptcy court really matters. If Detroit workers are willing to fight, they may be able to work a little magic of their own.