Detroit— Attorneys for Detroit’s pension funds and police and firefighters unions argued in court Tuesday the city should be granted eligibility for bankruptcy only if Emergency Manager Kevyn Orr is barred from slashing retiree pensions.
During the first day of oral arguments over legal issues surrounding the largest municipal bankruptcy filing in U.S. history, the objecting parties took a new legal strategy in trying to convince U.S. Bankruptcy Judge Steven Rhodes to rule now on whether Detroit can cut earned pension benefits in federal court.
Robert Gordon, an attorney representing Detroit’s two municipal pension funds, implored the judge to not put off the looming question of whether federal bankruptcy law can be used to violate Michigan’s state constitutional protections of vested pension rights.
“If the court rules in our favor, there will be less moving parts for the city to deal with … and it makes the process more streamlined,” Gordon said.
Gordon warned the 3-month-old bankruptcy case would become “more litigious” if the judge doesn’t decide whether pensions can be cut before Orr presents a debt-cutting plan by year’s end.
“It’s much easier to negotiate against the backdrop that the pension clause must be upheld,” Gordon said.
Rhodes said he would not rule on the legal issues surrounding the bankruptcy filing before an eligibility trial begins Oct. 23, when the city and its creditors will lay out evidence supporting their positions over whether the bankruptcy case should proceed.
But at several junctures during the daylong hearing, the judge questioned how Michigan’s constitutional protection of pensions should apply in his court.
“The question we all are struggling with is, what is the meaning, the substantive meaning of that provision in the context of a (city) that doesn’t have the means to comply with it?” Rhodes said.
Barbara Patek, an attorney representing a coalition of police and firefighter unions, said the bankruptcy filing creates an “imminent harm” for her members’ pensions and also asked Rhodes to rule soon on the issue.
“We’re entitled to know what our rights are,” Patek said.
“This is a hard question the court has to answer.”
City Attorney Bruce Bennett reiterated Orr’s contention that the federal bankruptcy code can be used to slash municipal pensions.
“The federal law on this issue is supreme and supreme over (state) constitutions and statutes,” Bennett said. “Period. End of story.”
The city and creditors are involved in mediation in hopes of resolving disputes, including the treatment of the unfunded portion of the city’s pension obligations.
Orr has pegged the unfunded liability at $3.5 billion, but the retirement systems dispute his calculations.
Bennett said it is too early to say how pensions will be treated if the city is eligible for bankruptcy relief given that Detroit may be able leverage additional cash out of some assets, such as the Water and Sewerage Department. “We just don’t know,” he said.
Given that Michigan’s constitutional protection of pensions doesn’t say which entity will backstop the benefits in the event of a bankruptcy, Rhodes also asked whether the state will step in to bail out the city’s pension fund.
“If we could get state money, that would be a great thing,” Bennett said.
“Thus far, the state has been of the view that (Detroit) has to reorganize based on its own financial resources.”
Attorneys for the unions, retirees and pension funds also argued Tuesday that Gov. Rick Snyder and Orr are trying to use the bankruptcy code to escape negotiations with the city’s numerous creditors owed an estimated $18.5 billion.
“The only way to escape is through the gates that your honor is standing at the door of,” said Claude Montgomery, a New York attorney representing a committee of retirees empaneled to negotiate with Orr on their behalf.
Attorneys for the retiree committee and pension funds argued pensions are deferred compensation akin to property owned by pensioners and that Orr is trying to use the bankruptcy code to divert the city’s tax dollars away from retirees’ bank accounts.
Bennett said the objectors’ arguments ignore the reality of a city hammered by the highest property taxes in the state and poor city services.
He argued Detroit’s legacy costs for employees and retirees, estimated at 42 cents of every dollar the city spends, cause the city to divert money away from public safety and other essential services.
“And no provision of any constitution will change this,” Bennett said.
Bennett also argued if pensions are cut, it will be up to the judge, not city or state officials. Chapter 9 merely gives the city the ability to adjust its debts, Bennett said.
“It doesn’t mean they’re the one loosening the knot or cutting the knot,” he said.
Contending Detroit is following the rules as written, the city’s attorney had a message for objectors to the way federal bankruptcy law treats municipalities.
“If you don’t like the powers that a court has in Chapter 9, write your congressman,” Bennett said.
Oral arguments continue today at the federal courthouse in Detroit.