Detroit's liabilities total $17 billion, including combined underfunding of $3.5 billion for the $2.77 billion Detroit General Retirement System and the $3.4 billion Detroit Police and Fire Retirement System. The funded status of the General Retirement System is 65% and that of the police and fire system is 78%, according to the creditor proposal.
Exactly how large Mr. Orr's promised benefit cuts will be depends on pending actuarial analysis. In union negotiations, Mr. Orr's advisers said employees with less than 10 years of vesting would be moved into a defined contribution plan. The defined benefit plan will be frozen, automatic cost-of-living raises would be eliminated, and employee contributions would rise, according to Bloomberg.
Sources interviewed for this story unanimously agreed the pension benefit cuts are an issue likely to be appealed all the way to the U.S. Supreme Court.
“Michigan's Constitution ... is crystal clear in stating that pension obligations may not be 'diminished or impaired,'“ William D. Schuette, Michigan's attorney general, said in a news release.
“The U.S. has been fighting the issue of state sovereignty for hundreds of years, the biggest fight being the Civil War. This is only the most recent battle,” said a long-tenured public pension fund attorney who asked not to be identified.
“The law on municipal bankruptcies is not at all clear yet on this issue of whether state or federal rights are primary in Chapter 9 cases. The U.S. Supreme Court is unlikely to be able to avoid consideration of the largest municipal bankruptcy in American history, especially when it boils down to a federalist debate,” the attorney said.
“Everything is hypothetical now. The emergency manager has announced pension cuts, but there are a lot of questions. How much? Who will be affected? When will this happen?” said Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees, Washington, which represents many of Detroit's public employees.
“There is no PBGC (Pension Benefit Guaranty Corp.) backstop for public plans, but there is the Michigan Constitution, which offers clear and strong pension protection for public employees,” Mr. Kreisberg said.
“This is the kind of case that should be heard by the highest court in the country because it is a national issue,” said C. Frederick Reish, a partner in the Los Angeles office of Drinker Biddle & Reath LLP.
It could be years before a definitive ruling is made about Detroit's restructuring plan.
“The Supreme Court usually likes to wait for several circuit courts to rule first so it gets a sense of the uniformity of opinion,” said Mr. Reish.
There is not as substantial a body of case law for municipal bankruptcies and that allows much room for judicial interpretation, said Chapman and Cutler's Mr. Spiotto, a Chapter 9 specialist attorney.
By way of comparison, Mr. Spiotto said there were more than 14,000 Chapter 11 corporate reorganizations filed in 2010, but just 301 Chapter 9 filings in the past 60 years combined. Only 62 of those cases were from cities, towns, villages and counties, and 46% of those were dismissed without an adjustment plan being confirmed, Mr. Spiotto's data show.
The largest municipal bankruptcies included Orange County, Calif.; Vallejo, Calif.; Jefferson County, Ala.; Stockton, Calif.; and San Bernardino, Calif.
On the question of state vs. federal rights, Mr. Spiotto said only five state constitutions besides Michigan's specifically protect public employee pension benefits — Alaska, Hawaii, Illinois, New Hampshire and New York.
Messrs. Reish and Spiotto are among attorneys who don't believe there will be a rush of bankruptcy filings by other municipalities seeking relief from pension obligations and other debt.
“I think there will be more bankruptcies filed, but it won't be a big number. There are not many other municipalities that are in straits as dire as Detroit's,” Mr. Reish said.
It would be “a game changer … if the bankruptcy judge uses the supremacy clause to overrule state law and cut the pension benefits,” said Natalie R. Cohen, managing director and head of municipal research at Wells Fargo Securities LLC, New York, in an e-mailed response to questions.
“But keep in mind that a municipality has to prove insolvency and negotiate in good faith in order to be eligible for bankruptcy, so that alone would temper a rash of filings.”
Attorney John Kennedy, a partner and public pension fund attorney in Nossaman LLP's Sacramento, Calif., office strongly disagreed.
“I think that because Detroit is so big and the process has been so public that it will encourage many other municipalities to seek Chapter 9 protection as one way to lower their pension obligations,” Mr. Kennedy said.