Municipal Bankruptcy and Public Pensions: Detroit's Eligibility for Chapter 9 Relief and Legal Restraints on the City's Actions as a Debtor

Article excerpt

"I'm a proponent of cities going bankrupt. Bridgeport will show the way. It's the only way out." (1)

--Richard M. Daley, Former Mayor of Chicago

INTRODUCTION

On July 18, 2013, after decades of steady economic decline, the City of Detroit, Michigan filed for bankruptcy in the Eastern District of Michigan under Chapter 9 of the United States Bankruptcy Code. (2) For years, Detroit has served as a cautionary tale for single-industry-dominated cities. Detroit is both the most populous U.S. city to declare bankruptcy and the most indebted municipality to ever file for relief. (3) Its exact debts have not yet been determined, but early estimates put the number somewhere between eighteen and twenty billion dollars. (4)

The case presents complex legal and political problems, but one group of creditors has received the bulk of media attention in the city's bankruptcy: pensioners. Pension commitments to both current and future retirees represent a sizeable portion of the city's overall debts, and estimates by Detroit's state-appointed Emergency Manager Kevyn Orr and his team place the amount of underfunded pension obligations at $3.5 billion. (5) Because ERISA pension pre-funding requirements do not apply to governmental pension plans, (6) many public pension systems are paid directly out of the municipality's yearly budget instead of being pre-funded by employee earnings. (7) Many cities across the country face similarly burgeoning underfunded pension debt, (8) and some states (including Michigan) have passed statutory or constitutional protection for pension benefits once they have been earned or have vested. (9) A recent estimate from a 2010 study conducted by Northwestern University economists pegs the total deficit in public pension plans in the United States at $574 billion. (10) This means that pensioners and municipal administrators across the country will be watching Detroit's bankruptcy closely, since any legal precedent set by the case will have enormous influence on the future of municipal bankruptcy law and the retirement outcomes of many Americans.

This Note will seek to address the constitutional and statutory issues raised in the early stages of Detroit's bankruptcy. Part I will briefly address how Detroit reached the point where municipal bankruptcy became legally possible and politically attractive. It will examine population trends in the city, changes in the character of Detroit's major industries, and the deterioration of city services.

Part II will provide background information about the history of municipal bankruptcy in America and the constitutional challenges that it has faced. It will attempt to give a base from which to examine the major issues raised by Detroit's case and how they might fit into the history of municipal bankruptcy and America's system of federalism. Specifically, it will address the Supreme Court's decision in United States v. Bekins (11) and some of the cases that have followed.

Part III will dive into the issues raised by objectors to Detroit's filing. While the objectors have raised at least thirteen distinct objections to the filing, this Note will concentrate on three. First, an effort will be made to demonstrate that contrary to some of the objections raised in the Detroit case, Chapter 9 is facially constitutional. Next, it will examine Michigan's authorization of Detroit's bankruptcy petition in accordance with [section] 109(c) of the Bankruptcy Code. (12) It will argue that Public Act 436, (13) the Michigan law that authorizes municipal bankruptcy and sets out the procedures that must be followed to file under Chapter 9, is constitutional and that the filing in this case complied with both federal and state law. It will also argue that Chapter 9 is constitutional as applied to Detroit, and that the protections present in Chapter 9 do more than enough to overcome any potential Tenth Amendment issue in Detroit's filing. …

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