Detroit bankruptcy, pension-cut scenario unlikely in Pa., N.J. cities

U.S. Judge Steven Rhodes approved Detroit’s bankruptcy filing last week, allowing city worker pensions to legally be slashed even though Michigan’s constitution protects them.

That’s got some people in Pennsylvania and New Jersey wondering: Could the same thing happen here?

 

Juliet Moringiello, a bankruptcy professor at the Widener University School of Law, said it is possible that a judge could issue a similar decision if a city in Pennsylvania or New Jersey sought bankruptcy protection. She said that both states allow their cities to file for Chapter 9 bankruptcy under certain circumstances.

“The point of Judge Rhodes’ opinion,” she said, “was that once the state gives its permission to a municipality to file for bankruptcy, then [federal] bankruptcy law trumps state protection of contracts and therefore pensions.”

Bill Brandt, a bankruptcy expert at the turnaround firm Development Specialists, agrees that a similar ruling is theoretically possible in Pennsylvania and New Jersey. But he said the two state governments probably wouldn’t let their cities become as financially distressed as Detroit in the first place.

“New Jersey and Pennsylvania will never see a municipality get to a point where, I think, its pensions will be decided under a Chapter 9 situation,” he said. “I think more likely in both states the state-sponsored regime for working through troubled municipalities will deal with that.”

Harrisburg’s City Council sought bankruptcy protection in 2011, but a judge dismissed the case after Pennsylvania legislators temporarily barred its eligibility. State law also prohibits Philadelphia from filing for bankruptcy until 2023 at the earliest.