On Tuesday, December 3, 2013, a bankruptcy judge from Detroit, Michigan held that the city could formally enter bankruptcy. This judge, Steven W. Rhodes, went even further by ruling that pension benefits could be reduced in a bankruptcy proceeding. This decision has caused uproar across the city as public employees realize the possible implications of this decision.
Previous to this decision it was a widely held belief that state laws preserve public pensions. Michigan’s Constitution even explicitly states that pensions were unassailable and that benefits would always be paid, either through higher taxes or budget cutbacks elsewhere. In his ruling, Judge Rhodes reasoned that public employee pensions are not protected in a federal Chapter 9 bankruptcy. He was quoted stating, “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy.”
Shortly after the decision was handed down the American Federation of State, County, and Municipal Employees (Afscme) asked for permission to appeal directly to the United States Court of Appeals for the Sixth Circuit. Officials of Detroit’s pension system plan to appeal as well. Many union members are especially upset because they bargained away potential salary increases in favor of pensions. Union officials argue that “the state Constitution represents the people’s will . . . That will cannot be ignored or subverted because it is financially convenient to do so.”
In the coming months we will see how this landmark decision will impact Detroit as well as the rest of the nation.