Who Does Municipal Bankruptcy Really Help?

Today’s Gongwer reports that a letter from Pontiac Emergency Manager Michael Stampfler suggests he is considering putting the city into municipal bankruptcy to resolve its severe financial problems.

As with any bankruptcy, a municipality enters into such an arrangement to get its financial house in order.  However, bankruptcy,  does not resolve everything. For example, a municipality may be able to discharge pension obligations going forward during bankruptcy proceedings. However, the final bankruptcy order does not eliminate a municipality’s duty to bargain over the pension terms and conditions of employment that created the obligations in the first place.

Filing for a municipal bankruptcy can assist the local government to eliminate its’ health-care obligations to retirees. However, discharging pension obligations in bankruptcy is complicated.

Typically, active employees are in jeopardy of losing more wages and benefits from an  Emergency Financial Manager (EFM) thank through bankruptcy proceedings. However, the reverse is the case for the retirees, who have the most to lose pursuant to a bankruptcy order.

We are not saying that bankruptcy is not useful for a city to address its financial certain, as certain obligations can be discharged during bankruptcy, but it is not necessarily the answer for long term financial resolution. The bottom line is that an EFM or filing for bankruptcy is just part of a longer term strategy for resolving a government’s financial problems.

For more information, please contact Fraser Trebilcock.