Detroit Debt Settlement--Will It Spread Throughout The Country? Are Your Savings, Pension and 401k Safe?

Detroit’s Bankruptcy Affects Us All

December 6, 2013 by Bob Livingston 

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PHOTOS.COM

Detroit municipal workers learned Tuesday that promises made by the city and their union leaders that they would have lifetime pensions and healthcare benefits were hollow ones. It’s an ill omen for pensioners across the country.

Detroit is $8 billion in debt, and a Federal judge ruled Tuesday the city can file for bankruptcy in order to develop a plan to reorganize (i.e., stiff bondholders and pensioners). The ruling allows the city to cut worker pensions and retiree health benefits, despite a provision in the Michigan Constitution protecting them.

Bondholders are expected to get back about 18 cents on the dollar, based on a plan previously submitted by the city’s emergency manager. But it’s the effect on public pension holders that is the most significant part of the ruling.

“This is the first opinion of its kind where a bankruptcy court has directly expressed the view that the supremacy of U.S. bankruptcy laws trumps state constitutional protections of public pension holders,” Mark S. Kaufman, senior partner at the Atlanta law firm McKenna, Long & Aldridge, told The Washington Post. “The implications of that decision are significant not only to Detroit but also potentially to other cities gauging their level of fiscal distress and how to deal with it.”

Detroit’s city workers were led down a primrose path by their union leaders, who promised to protect their interests. They willingly went along as the unions held the city’s citizens hostage over lucrative pension and Cadillac healthcare insurance promises that were unsustainable and would not have been attainable in a private-sector job.

With no bottom line to account for, Detroit’s elected class piled debt on top of debt. Bankruptcy Judge Steven Rhodes noted that had Detroit matched spending to revenue over the past several years, its debt would be $700 million rather than $18 billion. For perspective, at $18 billion, Detroit’s debts are more than twice as much as the total of the next four highest combined municipal bankruptcies: Jefferson County, Ala. ($4 billion); Orange County, Calif. ($2 billion); Stockton, Calif. ($1 billion); and San Bernardino County, Calif. ($500 million).

Unlike the Federal government (which can print money to infinity — and currently is doing so), States and municipalities have to rely on tax revenues — or Federal largess — in order to pay their bills. So when their commitments far exceed any conceivable revenue, something has to give.

Rhodes’ ruling opens the door for financially troubled cities and States across the Nation to likewise eliminate or slash exorbitant pensions and healthcare benefits promised its workers. There are dozens of municipalities (including Chicago, Houston and Baltimore) and several States (like Nevada, Illinois, Arizona and New Jersey) with huge debt loads. And then there’s the $200 trillion in future liabilities owed by the Federal government.

The Feds are already eyeing the almost $20 billion in Americans’ private pension funds, 401(k)s and individual retirement funds, as we have told you before here and here. And a report published last year shows that your bank savings aren’t safe either (somethingCypriots learned the hard way last year).

My advice for several years has been to take the penalty and cash out your retirement savings and exchange them for gold and silver bullion. Don’t tell anyone outside your inner circle you’ve done this. Keep cash on hand for three months, and only enough cash in the bank to cover a month’s bills. Bank savings accounts don’t pay enough interest to cover inflation anyway.

This is the only way to ensure you keep what is yours.