The fight to determine the legality of Detroit’s bankruptcy has begun. According to Reuters, the lawyers representing Detroit unions, retirees and creditors fought with the city attorneys this week to determine whether or not Michigan’s constitution protects retiree pension benefits from being slashed. The answer to this question could determine whether the city of Detroit can legally continue the bankruptcy process.
According to lawyers representing Detroit’s largest public union, Detroit has no legal right to declare Chapter 9 municipal bankruptcy because it “impairs the state of Michigan’s right to manage their own finances.”
Attorney Sharon Levine, representing Council 25 of the American Federation of State, County and Municipal Employees, argued that the city was attempting to “hide behind the federal bankruptcy process” and as a result could lose accountability of their own financial management. Levine considered accountability to be the “cornerstone of the state constitution.”
Instead, Levine argued the state should be responsible for restructuring their own debts and not avoid getting the full consent from all its creditors. Objectors to the bankruptcy filing also argue that Michigan’s constitution protects public pensions from being cut, but proponents of the plan argue this question could be decided at a later date and should not unhinge the entire bankruptcy plan.
What does the city of Detroit say?
Of course the city disagrees with Levine’s assessment. Bruce Bennett, an attorney with Jones Day that represents Detroit, argued the bankruptcy was not only legal but also a necessity to allow the city to renegotiate the terms of the city’s current debt load, which requires 65 cents of every tax dollar to be used to repay the city’s debt obligations. Bennett argued that the time, in fact, is now. If Detroit decides to wait any longer they will not be able to restructure their debt at all, even through the bankruptcy process.
“Ultimately, debts of all kinds will not be paid, and no provision of any constitution will change this,” Bennett said.
Tuesday was just the beginning of a two day hearing to address the legal questions about Detroit’s bankruptcy. Detroit officially filed for Chapter 9 bankruptcy on July 18th becoming the largest city in the history of the United States to do so. Over the next several days the court expects a lawyer from the U.S. Department of Justice to testify. His testimony is expected to support Detroit’s bankruptcy filing.
What does Detroit need to do?
According to Kevyn Orr, the appointed city manager, the pension benefits must be trimmed to help deal with Detroit’s $11.9 billion in unsecured debt and other obligations. The real question is whether or not deeming some of the city’s outstanding bonds, along with the city’s pension and retiree health care obligations, as unsecured debt is legal.
Although state law prohibits the city from paying only pennies on the dollar for pension debts, the question is whether it prohibits bankruptcy court from doing so. Some legal experts argue the federal laws supercede the clause in the state constitution that state pensions cannot be reduced. According to Bennett, “Federal law here is supreme. Period. End of story.”
But we will have to wait to see if the courts agree with him or not.
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