Detroit Judge Questions Bankruptcy Critics’ Pension Claim

A federal judge questioned whether pension rights for Detroit’s municipal workers can be guaranteed by Michigan’s constitution, as claimed by current and retired employees seeking to have the city’s $18 billion bankruptcy case thrown out.

U.S. Bankruptcy Judge Steven Rhodes pressed lawyers today to explain why Michigan municipal pensions can never be impaired and whether that position means the state must guarantee payment. Rhodes challenged unions and a city pension system about their claims that the state constitution bars any local government from a bankruptcy that would cut retiree payments.

“Is there any other constitutional right, state or federal that is that absolute?” Rhodes asked an attorney for a worker pension system that opposes the bankruptcy. “Even freedom of the press isn’t that absolute, is it?”

Union lawyers and a committee representing retired workers were in court in Detroit to ask Rhodes to reject the Chapter 9 filing.

In court papers, they have said that the city presented creditors with a “take it or leave it” plan to adjust its debt and that the bankruptcy code violates the U.S. Constitution by usurping rights that belong to the states.

Detroit’s bankruptcy will have “implications for blighted cities throughout the United States,” Sharon Levine, an attorney for the union, said at the start of today’s hearing.

Retirees and current workers cite a line in Michigan’s constitution that protects pensions as a contractual right.

“What do I do if bondholders come back and say the constitution protects them,” Rhodes asked Claude Montgomery, an attorney for a committee of retirees.

‘Absolute’ Protection

Montgomery responded that the pension protection is different from any for bondholders. Later in the hearing, Robert Gordon, an attorney for the pension system, said the Michigan constitutional protection for pensions is “absolute.”

“How can the state promise that when under the federal constitution the state can’t print money?” the judge asked. “Suppose we don’t have money, then what? It is an important issue. If you demonstrate there is a constitutional right there, what’s it worth if the entity that has the obligation doesn’t have the means.”

Union lawyers also invoked the Michigan Constitution to attack the decision by the state-appointed emergency manager, Kevyn Orr, to file the bankruptcy in July. Because Orr has said he may try to reduce pensions, the filing violates Michigan’s constitution, they argued.

Detroit filed the biggest bid for court protection by a U.S. city amid negotiations between the emergency manager, bondholders, public workers and retirees.

City’s Decline

Orr said six decades of economic decline had left Detroit unable to fully pay creditors, including retired city workers, and to provide necessary services.

The U.S. Justice Department last week filed a brief defending Chapter 9, arguing that decades of legal decisions show the law is constitutional.

The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Steven Church in U.S. bankruptcy court in Detroit at schurch3@bloomberg.net.

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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