Detroit Retiree Lawyer Says Pensions Live on Forever

Detroit’s retired municipal workers can never have their pensions legally reduced, even if a disaster makes the bankrupt city “cease to exist,” a retirees’ lawyer told a judge.

Should it be left with only one citizen to pay taxes, Detroit would still have an obligation to keep paying monthly pensions, attorney Thomas R. Morris, who represents an association of retirees, said today in court.

“If the city of Detroit were to cease to exist,” Michigan’s constitution would still require the pensions to be paid, Morris told U.S. Bankruptcy Judge Steven Rhodes in the next-to-last round of legal arguments about whether the city should be thrown out of bankruptcy. In that situation, Michigan would face a constitutional crisis, Morris said.

Employees and retirees are fighting to end the city’s $18 billion bankruptcy, saying the case illegally threatens protected benefits. Detroit and its critics return to court Oct. 23 for a multiday trial in which city and state officials, including Michigan Governor Rick Snyder, a Republican, may testify about whether the bankruptcy case should continue.

The city council today voted to reject a proposal by Detroit’s emergency manager to borrow $350 million from Barclays Plc (BARC) to help fund a settlement with a group of creditors and provide the city with cash.

Council Alternative

Under the state law that made bankruptcy lawyer Kevyn Orr the emergency manager, the council, within seven days, must propose an alternative to the financing to prevent it from being implemented.

Orr’s spokesman, Bill Nowling, said the vote has no impact because the council isn’t going to offer an alternative. The proposed loan will now go before a state financial emergency loan board for approval, Nowling said in an e-mail.

To remain in bankruptcy, the city must show that it either tried to negotiate with creditors or talks were impractical, that it intends to develop a plan to adjust its debt and that it was authorized by the state to file the case.

As part of the trial, Rhodes asked lawyers on both sides to present evidence about why state lawmakers added a spending provision to the emergency manager law adopted last year.

Union and retiree lawyers claim that law, PA 436, is invalid because the Michigan Legislature adopted it with minor changes after voters rejected the measure in a statewide referendum. Because the emergency manager who put Detroit under court protection was appointed under that law, the bankruptcy should be thrown out, critics argue.

Governor Testifies

Earlier this month, Snyder testified under oath about why he authorized Orr to file the bankruptcy. That testimony was videotaped. One of the city’s unions has subpoenaed Snyder to testify in court.

Detroit filed the biggest U.S. municipal bankruptcy amid negotiations between Orr, bondholders, public workers and retirees. Orr said six decades of economic decline left Detroit unable to fully pay creditors, including retired workers, and still provide necessary services.

Union and retiree lawyers claim the city didn’t negotiate in good faith and instead presented a take-it-or-leave proposal.

Rhodes said that if the union and retiree lawyers are correct, the pension protection either violates Chapter 9 of the U.S. Bankruptcy Code or no city in Michigan can ever file for court protection under that law unless it promises to never cut pensions.

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 7606 or schurch3@bloomberg.net

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

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