01.29.14

The Indelicate Art of Balancing Federalism. Michigan Attorney General Bill Schuette yesterday requested the 6th U.S. Circuit Court of Appeals render a speedy decision on whether Detroit may cut its pensions as part of the city’s plan of adjustment for emerging from municipal bankruptcy—a plan due to U.S. Bankruptcy Judge Stephen Rhodes by no later than March 1st. In his brief, Attorney General Scheutte noted his was a question of national importance:

“The Attorney General on behalf of the People seeks to vindicate Michigan’s Constitution. The People of the State of Michigan ratified the 1963 Constitution and through that foundational law, including Article IX, § 24, exercised the State of Michigan’s power to regulate its local municipal governments exercise of governmental power—including the municipal power to allocate and spend collected revenues…Is the City of Detroit duty bound to honor and comply with Michigan’s constitutional protection of vested governmental pensions while in federal bankruptcy? Or can the City cast aside its constitutional obligations? These are compelling questions of national importance—and they cannot be deferred until later.

Michigan’s Pension Clause creates more than mere contract rights: their inviolability is a part of fundamental Michigan law, and the City cannot discharge these obligations in bankruptcy. To be clear: the Attorney General does not challenge the Michigan Governor’s authorization of the City to enter bankruptcy (and agrees with the bankruptcy court’s decision on eligibility). But this authorization was necessarily constrained by the City’s constitutional obligations, because Public Act 436 that authorizes bankruptcy is informed by Michigan’s Constitution under Article IX, §24 and because this duty to hold pensions inviolate persists in bankruptcy under 11 U.S.C. § 903. The City can no more discharge these debts than it can suspend civil liberties, seize the property of former employees, or cancel elections—all fundamental violations of Michigan law.”

Attorney General Schuette filed the court brief in an almost Jekyll and Hyde conundrum, because he serves in a unique dual role on this historic question before both the 9th and 6th U.S. Courts of Appeal in which both federal courts have been petitioned to parse the issue with regard to whether public pensions have the same status as contracts, and, ergo, can be cut in Chapter 9, municipal bankruptcy—as both U.S. Bankruptcy Judges Meredith Jury and Rhodes have, notwithstanding contrary state constitutional protections. Attorney General Schuette is in an even more awkward quandary, as he also finds himself in a dual role: he serves both as counsel to Gov. Rick Snyder, who authorized the Motor City’s filing for municipal bankruptcy and appointed Emergency Manager Kevyn Orr who has made clear that there will have to be cuts in the city’s pension obligations if it is to have any chance to emerge from bankruptcy; but also as the Wolverine state’s elected Attorney General—in which capacity he feels duty-bound to uphold Michigan’s constitution—thereby arguing since last summer that Detroit’s effort to cut public pensions violates Michigan’s constitutional clause banning any impairment or reduction in the claims. Therefore, Mr. Scheutte yesterday in his brief argued that the questions of whether Detroit is bound to comply with the state constitution or not calls for immediate review: “These are compelling questions of national importance — and they cannot be deferred until later…No bankruptcy court decision, to date, has reviewed the question whether a state constitutional provision, like Michigan’s pension clause, continues to bind in bankruptcy.” Moreover, as Mr. Scheutte noted, some signal from the 6th Circuit is becoming increasingly urgent, because the city and its creditors are in the midst of mediation talks, which “should be framed by the proper legal understanding of the city’s obligation….The parties need this court to correct the bankruptcy court’s error now: for the retirees, the reduction of pension payments for any duration is a significant harm…Without this court’s immediate review, the ability to correct any error later may be lost.” Moreover, Mr. Scheutte wrote, Michigan’s constitution’s pension clause is a “fundamental law” different from a mere contract, so that, he argues, it cannot be impaired in Chapter 9. Finally, he reminded the court, Mr. Orr is a state-appointed public officer; therefore, he is duty-bound to uphold the state constitution. (The creditors appealing Judge Rhodes’ pension decision include the Motor City’s two pensions systems, a committee representing 23,000 Detroit retirees, several unions, and retired police and fire associations. No bond insurers or bondholders have appealed the decision.

The Fine Art of Recovery. The W.K. Kellogg Foundation of Battle Creek, Michigan yesterday added considerable snap, crackle, and pop to the rescue fund for Detroit pensioners and the Detroit Institute of Arts in the form of a $40 million pledge, announcing it was making the pledge to the innovative and unique federally mediated fund artfully designed to help protect Motor City pensioners, especially low income pensioners, and the Detroit Institute of the Arts. The gift marked the tenth in an effort that now includes nine other national and local foundations, and means that, in conjunction with Gov. Rick Snyder’s $350 million in proposed state funding, the rescue fund now totals at least $720 million. Kellogg, in making its announcement, noted: “We see this as an investment in Detroit, its children and families, and our shared future. We have a strong belief that people have the inherent capacity to solve their own problems and our support is meant to come alongside and strengthen the opportunities for success.” Kellogg leaders were among the initial group of foundation officials who began meeting with Chief U.S. District Judge Gerald Rosen last November; its gift announcement yesterday is the third-largest after $125 million from the New York-based Ford Foundation and $100 million from the Kresge Foundation in Troy. Judge Rosen’s office, in response, yesterday issued a statement in which it praised the Kellogg Foundation’s contribution as “remarkably generous.” The statement noted mediators would continue to facilitate agreements among as many parties as possible to help “provide Detroit with a prompt and successful exit from the bankruptcy and to move us toward a revitalized and renewed city.” The gift came as the Institute itself is attempting to balance the pressure to publicly commit to a significant fund-raising target for its contribution to this unique effort, whilst at the same time avoiding undercutting its own ability to raise hundreds of millions of dollars in critical endowment dollars and annual operating funds over the next decade.

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