Detroit Decision: Pensions Can Be Cut in Bankruptcy

As reported in Governing, a Detroit bankruptcy judge has sided with the city in ruling that pensions could be subject to cuts under Chapter 9 bankruptcy protection. As described:

Rhodes, who spent one and a half hours delivering his opinion from the bench, concluded that the city’s pension debt was similar to other creditor debt and that any state constitutional protections for pensions did not apply in federal bankruptcy court. Unions have argued that pensions, which are protected under Michigan’s constitution, cannot be impaired. Detroit’s claim is that state constitutional protections no longer hold in federal bankruptcy court and that pension payments can be cut like any other debt to creditors.

“Nothing distinguishes pension debts from other municipal debts, notwithstanding the state constitution,” Rhodes said, according to media reports. He added that “it has long been understood that bankruptcy law entails the impairment of contracts … [and] pension rights are contract rights under the Michigan constitution.”

For more information, see the full story from Governing.

Prior articles in Governing and elsewhere have emphasized that bankruptcy filings by US municipalities are extremely rare, and the accessibility of bankruptcy varies from state to state.  While in Michigan, Chapter 9 filing by municipalities is authorized, in Maryland, no Chapter 9 authorization is outlined.

For more information on how many municipalities have filed for bankruptcy, see the full story from Governing.  For more information on bankruptcy laws nationwide, see the full story from Governing.

Nonetheless, today’s decision is being called a landmark in pensions law.  As reported in the New York Times lawyers and union representatives are discussing its potential precedent-setting effects,

Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, was blunt in his assessment. “This is one of the strongest protected pension obligations in the country here in Michigan,” he said. “If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone.”

For more information, see the full story from the New York Times.