When Detroit’s emergency manager Kevyn Orr’s team holds the first of several meetings with Detroit’s unions and pensions funds, a single paragraph in the Michigan Constitution will hang over the proceedings looking at Detroit’s pensions, according to an analysis in the Detroit News today. “The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof and shall not be diminished or impaired thereby,” reads Section 24 of Article IX of Michigan’s constitution. However, Orr’s restructuring proposal, the likely template for any chapter 9 bankruptcy filing, proposes to cut benefits because he says the city cannot afford them nor raise taxes to honor them. “The federal bankruptcy judge will make a decision,” Attorney General Bill Schuette said. He declined to say whether the constitutional protection could — or could not — be pierced in bankruptcy. “Chapter 9 recognizes that there are limitations on the power of the bankruptcy court,” write Harold S. Horwich and Christopher L. Carter, attorneys with Bingham McCutchen LLP, in the ABI Journal. “A plan cannot be confirmed if the results would be that ... the municipality would be in violation of state law. However, not every violation of state law is beyond the power of the bankruptcy laws to discharge.” They say it is “unclear” whether the constitutional protections for pensions in Michigan and Louisiana, to name two, apply only to state government “or whether they would also apply to bankruptcy modification.”
