Detroit Bankruptcy: Pension Benefits and Constitutionality

By: Reginald Augustus

Will Detroit’s bankruptcy filing be the end of the retiree’s pensions in the motor city as they know it?    If so, should State officials have the right to threaten the pensions of retirees?  Last week, Michigan’s Governor Rick Snyder authorized Detroit’s filing for bankruptcy claiming that while it was a tough decision, it was the right one.  A combination of residential and business flight from Detroit, loss of manufacturing, mismanagement and corruption coupled with the economic downturn in the country has put pensions of the city’s police, fireman, and other government retirees at risk.  The decision has sparked a legal battle questioning the constitutionality of the filing based on the laws of the state of Michigan.

Subsequent to the bankruptcy filing, Ingham County Circuit Judge Rosemarie Aquilina ruled that the bankruptcy filing violated the Michigan Constitution and state law.   At issue is whether the filing violated the state constitution because pension benefits for the city’s retired workers are being threatened.  Those opposed to the bankruptcy argue that the state’s constitution prevents the removal of retirees’ pension benefits.  However, it is likely that the county circuit court judge’s ruling will not have a significant impact because the filing was done in federal court prior to the order and Federal law usually trumps state law.  In addition, the city included the state as a party to the filing to try to mitigate the judge’s ruling and prevent similar orders against the state.  Pursuant to Chapter 9 of the bankruptcy code, cities have the right to make modifications to pensions.  It appears that Congress has given the bankruptcy courts the authority to make determinations that involve preemption.  The city is looking to have the case heard in U.S. District Court soon to decide on this matter.

City officials have explained in numerous public speaking engagements that filing for the bankruptcy of Detroit was the best possible course of action to deal with the nearly $18.5 billion in obligations.  Detroit is the biggest city to ever file for bankruptcy.  The city has been on the decline for many years now.  Detroit was once considered the capital of manufacturing in the U.S., but a decline in its industrial foundation has led to a steady decline in its fortunes.  Despite the automobile industry recovery, the city has failed to recover alongside many other major cities in the country.  Detroit’s unemployment rate has dropped significantly, but more than 16.3 percent of its residents are still out of work.  Lack of income tax revenues and home price recoveries combined with thousands of vacant lots and buildings, increased fires, and crimes have led to an over-burdening of emergency services.  In response to these issues, many former residents of the city moved and Detroit’s population has fallen by over a quarter within the last decade.  Obligations continued to grow as tax revenues decreased due largely to a growing number of over 30,000 retirees who were promised pensions for life and health benefits by city officials.  The city, which now owes billions, failed to adequately fund those obligations.

Whatever decision is made in this legal battle may set a precedent that can then be followed by several other cities in the country also facing financial hardships that may lead to additional bankruptcy filings.  There are several states that have similar state laws that prohibit retiree pension cuts.  Other cities that have not provided adequate funding to their pension plans may also consider filing bankruptcy if the filing in Michigan is allowed to proceed.

There is no easy answer to the question of how to solve this problem.  On the one hand, you have retirees who paid into a system they were promised would always take care of them.  They trusted in that system and held up their end of the bargain by giving many years of dedicated service to the city.  On the other hand, you have a cash-strapped municipality that is trying to find the best way to solve their current debtor obligations.  However, if the city’s problems were self-inflicted based on mismanagement of funds and corruption within the government should they be allowed to successfully file and release their debt to the retirees?  In my opinion, the city should be allowed to file bankruptcy based on Federal law which preempts state law.  However, there should be stipulations in any agreement that requires the government to pay back the benefits owed to the retirees upon being solvent again;  placing those retirees at the top of the list of creditors to be paid first.  Our most important resource should always be our people, especially when those people were largely responsible for the success and proliferation of the city for so many years even when it was collapsing around them.

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