A federal judge questioned whether pension rights for Detroit's municipal workers can be guaranteed by the Michigan Constitution, as claimed by current and retired employees seeking to have the city's $18 billion bankruptcy case thrown out.
U.S. Bankruptcy Judge Steven Rhodes pressed lawyers Tuesday in a Detroit court to explain why Michigan municipal pension commitments can never be revised and to say whether that position means the state must guarantee payments.
Mr. Rhodes challenged unions and a city pension system on their claims that the state constitution bars any cuts to municipal retiree payments, in or out of bankruptcy. Even proposing the cuts makes a city ineligible for bankruptcy protection, they have said.
“Is there any other constitutional right, state or federal that is that absolute?” Mr. Rhodes asked an attorney for a pension system that opposes the bankruptcy. “Even freedom of the press isn't that absolute, is it?”
Union lawyers and a committee representing retired workers made legal arguments to have the city's filing under Chapter 9 of the U.S. Bankruptcy Code rejected. The hearing was scheduled to continue Wednesday. Next week, Mr. Rhodes is set to hear from witnesses about whether the city is eligible to remain in bankruptcy.
Detroit filed the biggest bid for court protection by a U.S. city amid negotiations among the city's emergency manager, bondholders, public workers and retirees. Kevyn Orr, the state-appointed emergency manager, said six decades of economic decline had left Detroit unable to fully pay creditors, including retired workers, and still provide necessary services.
A Chapter 9 petitioner such as Detroit must prove to a judge that it's eligible for continued court protection from creditors. To remain in bankruptcy, a municipality must show that the filing was authorized under state law, that public officials intend to file a plan to adjust debt and that they tried to negotiate with creditors.
In court papers, critics said the city presented creditors with a “take it or leave it” debt-adjustment plan and the Bankruptcy Code violates the U.S. Constitution by usurping rights that belong to the states.