Detroit's Bankruptcy: Lessons For Employers

Detroit's Bankruptcy: Lessons For Employers

 Most of the national attention to Detroit's bankruptcy has subsided. Those of us here in Detroit, however, have a daily dose of news about the proceeding. The Detroit Free Press ran an excellent in depth article this Sunday concerning to the causes of the city's financial disaster. As painful as the article is to read, it also has some lessons for employers, especially those whose employees are represented by unions.

As noted by a former employee Bettie Buss, the city had a culture of how do we get what we want and not pay for it until tomorrow and tomorrow and tomorrow. The city failed to cut its workforce even though the money to pay them was drying up. The city also failed to take advantage of productivity that could be realized through technology.

The city failed to address the legacy costs of retiree pensions and health care which were allowed to spiral out of control and were not effectively addressed in contract negotiations with the unions. The pension funds distributed over a billion dollars in bonuses to retirees and active workers from 1985 and 2008, a practice known as the "13th check."  One analyst estimated that the value of the bonuses to the funds and to the city today would be over 1.9 billion dollars. Perhaps the continuation of the payments was rationalized as a past practice under the city's collective bargaining agreements.

So employers can see that Detroit did not monitor the employment levels and implement reductions in force when they would have been most needed and most effective. The payment of the 13th check is hopefully a practice that cannot and will not be copied by other employers. The failure to address the legacy costs of the health and pension obligations played a major role in pushing Detroit into bankruptcy. The unions' role in opposing attempts to reduce benefits through political pressure, arbitration, and litigation ensured that the legacy costs would not be addressed. In sum, the message to employers is don't give what you don't have and can't afford.

For additional Labor and Employment law insights from John Holmquist, visit the Michigan Employment Law Connection.

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