Calpers Says Detroit Bankruptcy Ruling Threatens System

The California Public Employees’ Retirement System said a ruling by a judge in Detroit that federal bankruptcy law takes precedence over state law may threaten the soundness of public pension systems as a whole.

Calpers, the largest state-run pension system in the U.S., filed a friend-of-the-court brief today in the federal appeals court in Cincinnati, which has been asked to consider a challenge to Detroit’s eligibility for bankruptcy protection.

U.S. Bankruptcy Judge Steven Rhodes ruled last year that Detroit was entitled to creditor protection under Chapter 9 of the U.S. Bankruptcy Code and could try to alter the terms of workers’ pensions. The decision, which would let a bankrupt municipality fail to meet its pension obligations in spite of state prohibitions, was “wrong on several levels,” Calpers said.

“Congress did not envision that Chapter 9 would become a haven for municipalities that seek to ignore and break state laws and constitutional provisions in order to adjust their debts,” the pension fund said.

Calpers, which has been involved in disputes with the bankrupt city of San Bernardino, California, said the judge’s decision raises issues of critical importance to its 1.7 million members. If a municipality in bankruptcy is allowed to break state laws and ignore its obligations to the pension system, it “may threaten the actuarial soundness of the system as a whole,” Calpers said.

City Services

Detroit filed the biggest-ever U.S. municipal bankruptcy in July, seeking to adjust $18 billion in debt. The city says it doesn’t have the money to pay bondholders, retirees and employees everything it owes them while still providing its 700,000 residents basic city services such as ambulances and streetlights.

In December, Rhodes found that Detroit was eligible for bankruptcy protection and that it can try to cut public pensions, which city workers have said are protected by the Michigan Constitution. The city’s pension funds have appealed his ruling.

Detroit has since reached agreements with retirees and pension funds on some cuts.

The Detroit pension funds have made arguments similar to those Calpers raised in litigation with San Bernardino over that city’s bankruptcy. The funds have said the cities didn’t negotiate in good faith with creditors before seeking bankruptcy court protection.

Representatives of Kevyn Orr, Detroit’s emergency financial manager, didn’t immediately respond to an e-mail seeking comment on the Calpers filing.

The appeal is In re Police and Fire Retirement System of the City of Detroit v. City of Detroit, 14-1208, U.S. Court of Appeals for the Sixth Circuit.

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