Judge: Detroit can cut employee pensions

Bankruptcy

By Nathan Bomey, Detroit Free Press

Pensions legally can be cut in Detroit's bankruptcy, U.S. Bankruptcy Judge Steven Rhodes ruled Tuesday.

Rhodes emphasized that he won't necessarily allow pension cuts to be approved in the city's final reorganization plan, called a "plan of adjustment."

The ruling came as a significant surprise to people observing the case. Rhodes previously had signaled that he planned to decide the issue of whether the pensions could be cut later in the case. But Tuesday he said he changed his mind and decided that ruling on the issue immediately would expedite the bankruptcy.

The city must propose an equitable reorganization plan that treats all creditors fairly, the judge said.
"Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy," Rhodes said.

The Michigan Constitution protects public pensions as a "contractual obligation" that cannot be "diminished or impaired." But the U.S. government allows contract cuts in bankruptcy, and Rhodes ruled that federal law preempts the state Constitution.

One union already has appealed the ruling; others are expected to follow.