Detroit Bankruptcy – Pensions may take a “haircut”

Hidden on the fourth page of the Daily Journal, I fell upon a remarkable decision…one that seems to have caught little notice among my peers.

Federal Bankruptcy Law Trumps The State Constitution!  So says Bankruptcy Judge Steve Rhodes as he specifically pointed to the Federal Bankruptcy Code as a method to not only modify the rights of pension holders but went further to add that Pensions ARE NOT entitled to  “extraordinary protection”. Now, I am not too bashful to admit nor too proud to declare —But I am surprised as to the directness of the oral opinion.  I am only surprised as I thought the constitution with ironclad protections (i.e. ” the financial benefits of each pension plan and retirement system of the state and its political subdivisions . . . shall not be diminished”) would entitle the State(‘s) the political and legislative weight to protect those very specific provisions. Judge Rhodes found that if the legislatures truly wanted to protect the pensioners from taking a “haircut” like those of “general bondholders” then they could of taken the additional step in amending the state constitution to protect pensions from Bankruptcy, however “it did not” and therefore a Final Salary Transfer Advice was necessary for the pensioners, since no one led them to the right path.

His premise? “This once proud and prosperous city can’t pay its debts. It’s insolvent. It’s eligible for bankruptcy,” Rhodes said in announcing his decision. “At the same time, it also has an opportunity for a fresh start.”

In the end, the decision by Judge Rhodes is already up for appeal by the Unions with a interest in the decision.  And the court certainly left some wiggle room in its decision cautioning that the promised retirement payment may ultimately receive “special consideration.” However, its ultimate conclusion was ” Impairing contracts is what the bankruptcy process does. . . For Tenth Amendment and state sovereignty purposes, nothing distinguishes pension debt in a municipal bankruptcy case from any other debt. ”

So, like all important decisions, it is a little too premature to call this the final law of the land. But, its the first shot across the bow for an issue that will likely find itself before the US Supreme Court before too long. I imagine this wont be the last decision for which distinguished minds will differ and I would love to be a fly on the wall in Judge Rhodes chambers until this all settles itself out…

More to come…..

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