Detroit, MI made news last week with its filing, seeking Chapter 9 protection and restructuring of its debt of $18.5 billion.
The city is self insured for workers' compensation.
And unlike the automakers that call Detroit home, reliance on the state self-insured security fund may be necessary to keep workers' compensation benefits flowing to injured workers and to meet new obligations that may arise during bankruptcy pendancy.
In 2009, General Motors and Chrysler went through their restructures, but did not call upon the self-insured security fund, because trustees at the time felt that doing so would also bankrupt the fund, and would result in more cost than could be saved due to the companies' cross-jurisidiction liabilities.
Those arguments are invalid in the city's case. The city's workers' compensation liabilities are limited to the state of Michigan, and the workers' compensation liabilities of the city are much smaller than either GM or Chrysler at the time.
In the meantime, the city's retired employees are seeking to block Detroit's Chapter 9 filing, saying it violated the state’s Constitution because it could cut city workers’ pensions in violation of the Michigan state constitution.
The city of course argues that the lawsuit belongs in the bankruptcy court.
While the Supremacy Clause of the United States Constitution would generally make the bankruptcy court supreme over any state court, Samuel J. Gerdano, the executive director of the American Bankruptcy Institute told the New York Times that Chapter 9 bankruptcy does have a provision that prohibits proposing a bankruptcy plan that violates state law, which in Michigan’s case could include making changes to accrued public employee pensions and benefits.
It is unclear whether workers' compensation would be included in this context.
Fellow blogger, New Jersey attorney Jon Gelman, said on Friday that the bankruptcy filing "is a sentinel event marking the end of a booming industrial era for the US, and its disability and retirement programs, and demonstrates the consequences of a benefit scheme built on empty promises for injured workers."
While the city's filing is certainly the largest of municipal bankruptcies in history, I'm not sure it is the end of an era, nor reflective of an empty promise.
What the filing does show is how intricately woven workers' compensation is into the overall economy.
By its nature, workers' compensation is designed to allocate risk over a broad base so that any individual action can be absorbed by the population at large.
That is why there are security funds in place to accommodate situations where an employer can no longer meet its financial obligations.
Yes, the risk is then spread to the general population which ultimately may result in increased taxes or assessments (and in Michigan's case, there is declining population upon which to spread that risk, which means greater proportional share by each individual tax payer).
But the promise to employees is that there is a system in place upon which we can all rely in the unfortunate event of a work place injury.
When the city of Vallejo, CA submitted its bankruptcy plan in 2009, resolution of workers' compensation claims were subject to a hefty discount according to the Wall Street Journal. I suspect, however, that the reporter of that story was confused about "compensation" and mixed up the city's actual workers' compensation program with its other retirement and benefit systems.
According to broker/consultant James Moore, when Stockton, CA filed for bankruptcy protection last year, then the largest municipal filing in the country, its workers' compensation obligations were secure because the city's program was fully funded as a stand alone program.
Detroit's case is much, much bigger though, and by early reports its workers' compensation program is not well funded.
I don't know how all of this is going to play out. Nobody does.
But I do feel confident that the support inherent in Michigan's workers' compensation system will continue to injured workers.
I hope I'm right.