Reuters reports the General Retirement System and Police and Fire Retirement System, which are two of Detroit’s largest unsecured creditors, have asked the United States 6th Circuit Court of Appeals to hear their expedited appeal of the decision made by U.S. Bankruptcy Judge Steven Rhodes which allowed Detroit to file for bankruptcy protection. If the appeals court agrees to hear the case it would allow the case to bypass the United States District Court for the Eastern District of Michigan.
Detroit’s bankruptcy case is considered a landmark case, not just for Detroit, but potentially for other cities throughout the United States, many of which are facing a similar financial crisis. According to one attorney for the pension fund, the consequences of cutting pension benefits could be “life-changing for thousands of active and retired police officers, firefighters, librarians, government clerks, public works employees and many others.”
What’s at stake for Detroit?
What’s in question and will be decided by the United States 6th Circuit Court of Appeals is the legality of the ruling made earlier this month by U.S. Bankruptcy Judge Steven Rhodes. In his ruling in the Detroit bankruptcy case he decided that Detroit did in fact meet the federal requirements for filing bankruptcy.
The judge ruled that not only was the city of Detroit insolvent, but given the number of creditors it would be impossible for Detroit to successfully renegotiate their almost $18.5 billion in debt. Rhodes also shocked many financial experts by ruling that federal bankruptcy laws trumped state laws and pension benefits could be cut as part of Detroit’s restructuring efforts.
Attorneys for the pension funds, however, argued that Michigan’s constitution protects pensions from being cut and have taken their case to the United States 6th Circuit Court of Appeals. As part of the appeal they will also argue that it is not legal for Detroit to reduce pensions, and this could have long-term consequences for other United State cities, many of which are also in financial trouble.
While Rhodes agreed to allow the appeal to go directly to the appeals court, he has said that he believes a ruling from the appeals court should be done after Detroit submits their debt repayment plan. Rhodes also believes Detroit’s efforts to improve their financial position could be hindered by “piecemeal appellate litigation.”
What are the next steps for Detroit?
While Detroit waits for the appellate ruling they will move forward with creating and submitting their debt repayment plan. In fact, according to Detroit Emergency Manager Kevyn Orr, the city plans to have their repayment plan submitted to the court as early as January.
Now the city and pension plan administrators have nothing left to do but wait and see if they will be allowed to cut pension debts or if the courts will rule that pension debts will remain sacrosanct and will remain a burden to the city.
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