In addition, the judge indicated public employee pensions are not protected in a federal Chapter 9 bankruptcy, even though the Michigan Constitution expressly protects them. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” said Judge Steven W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan, according to news reports.
The National Conference on Public Employee Retirement Systems (NCPERS) says it “strenuously” objects to Judge Rhodes’s decisions. However, while news reports are speculating this will create a domino effect with other troubled cities, NCPERS Executive Director Hank Kim, Esq. says in a statement: “We do not believe that today’s ruling is a harbinger of a wave of bankruptcies by cities.”
Kim points out, “Detroit is an extreme example of municipal financial decline, having lost 75% of its citizen population and 80% of its tax-paying population.” He contends those are the root causes of Detroit’s financial predicament, rather than overly generous pension plans.
Kim also notes 27 states do not permit municipal bankruptcy, and states cannot file for bankruptcy. He says the vast majority of public pension plans are well funded, at a cost of less than 3% of the state or municipal budget (see “City Pensions Not the Burden Media Suggests”).
City pension funds and unions also oppose the judge’s ruling. The pension funds filed lawsuits to try to block the bankruptcy, but those lawsuits were stayed by Rhodes. Now there is talk they will file appeals. At least one union did file an appeal as soon as Rhodes’ decision was made, according to news reports.
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