Pension Boards Plan to Object to Detroit's Bankruptcy Eligibility

David Sole, right of the Moratorium NOW! Coalition and Abayomi Azikiwe, editor of the Pan-African News Wire, stand in front of the federal court house during the first day of Detroit's municipal bankruptcy proceedings., a photo by Pan-African News Wire File Photos on Flickr.

Pension boards plan to object to Detroit's bankruptcy eligibility

8:15 PM, August 15, 2013
By Nathan Bomey
Detroit Free Press Business Writer

Detroit’s two pension boards plan to object to the city’s eligibility to file for bankruptcy, setting the stage for a battle over whether Detroit’s Chapter 9 reorganization can proceed.

The General Retirement System and Detroit Police and Fire Retirement System, which manages pension assets for the city’s emergency responders, both will file an eligibility objection by the Monday deadline, spokesman Bruce Babiarz said today.

Objections to a city’s eligibility for bankruptcy are common in Chapter 9 cases. For example, in the bankruptcy case of Vallejo, Calif., it took about a year to simply decide whether the city was eligible.

In Detroit, Judge Steven Rhodes has set an Oct. 23 trial to hear arguments about the city’s eligibility for Chapter 9. To qualify for Chapter 9 bankruptcy protection, municipalities must meet a series of eligibility criteria. Among them: The city must have the state’s authority to file for bankruptcy.

■ Related: Analysis shows Detroit pension funds in better shape than Orr says

The pension boards plan to argue that Michigan Gov. Rick Snyder didn’t have the authority to file without ensuring that retiree pensions would be protected from cuts, Babiarz said.

Snyder signed off on Detroit emergency manager Kevyn Orr’s decision to place the city into bankruptcy court on July 18. The pension funds are arguing he should have prohibited Orr from pursuing pension cuts.

A spokesman for Orr was not immediately available for comment.

The Michigan Constitution protects public pensions as a “contractual obligation” that cannot be “diminished or impaired.” But Orr has argued federal bankruptcy law, which allows contacts to be severed, pre-empts the state constitution and allows significant cuts.

Babiarz would not say whether the pension boards also plan to argue the city did not negotiate in good faith or whether the pension board plans to argue the city is not insolvent.

Orr has pegged Detroit’s unfunded pension liabilities at about $3.5 billion, but the pension boards have argued the real figure is far less.

“We’ve not seen all the data yet,” Babiarz said. “Obviously, the city’s got dire financial issues. We were still in due diligence when the bankruptcy was filed and look forward to continued negotiations, even in light of the fact that the whole matter is in bankruptcy court.”

Separately today, the Retired Detroit Police and Fire Fighters Association and the Detroit Retired City Employees Association objected to a motion that would allow Detroit to complete an agreement with UBS and Merrill Lynch to settle a dispute with bond insurer Syncora over the fate of a contract related to the city’s pension debt.

The associations said the city should not win Rhodes’ approval to settle the dispute until the U.S. Trustee forms a new association to represent Detroit retirees and that association can review the proposed settlement.

Rhodes is expected to hear arguments about the proposed settlement in a hearing Wednesday morning.

Contact Nathan Bomey: 313-223-4743 or nbomey@freepress.com. Follow him on Twitter @NathanBomey.