05.05.14

Looking for the Checkered Flag. Chief U.S. Judge Gerald Rosen Friday afternoon announced that the Motor City Retired City Employees Association, which represents some 8,000 members, had voted in favor of supporting Detroit’s proposed plan of adjustment: “The mediators are privileged to have assisted the parties in reaching a resolution of these important retirement issues that reflects not only a fair settlement for the parties, but also recognizes the important role that the city’s retirees played in faithfully serving the city and its residents over so many years,” noting the city’s civilian retirees “will have a meaningful voice” in the governance of a Voluntary Employees Beneficiary Association (VEBA) trust that will be established to manage and deliver reduced health care benefits. The Association represents about 75 percent of the city’s eligible general retirees. As part of that agreement, the Association will recommend that members vote yes on 4.5% cuts to monthly pension checks, the elimination of annual cost-of-living adjustment increases, and health care benefit cuts. As with other tentative agreements, this one is contingent upon the state of Michigan contributing $350 million over 20 years to help fund what now seems to be termed the “grand bargain” in which pension cuts would be reduced and the Detroit Institute of Arts would be allowed to spin off as an independent institution. Nonprofit foundations have already pledged $366 million to the grand bargain, and the DIA has pledged to raise $100 million. With the announcement, Judge Steven Rhodes Friday afternoon agreed to the city’s request to extend the deadline to file an amended disclosure statement until this afternoon.

The Battle of Federalism. The California Public Employees’ Retirement System, or Calpers, late Thursday filed an amicus brief in support of appeals challenging U.S. Bankruptcy Judge Steven Rhodes’ decision last December finding Detroiteligible for federal municipal bankruptcy protection, alleging that Judge Rhodes’ ruling that federal bankruptcy law takes precedence over state law may threaten the soundness of state and local public pension systems as a whole. Calpers, in its brief, wrote that Judge Rhodes’ decision, which would permit federal law to trump a state constitution, was “wrong on several levels,” noting that “Congress did not envision that Chapter 9 would become a haven for municipalities that seek to ignore and break state laws and constitutional provisions in order to adjust their debts.” Calpers, which has filed a challenge to U.S. Bankruptcy Judge Meredith Jury’s decision finding San Bernardino eligible for federal municipal bankruptcy protection with the 9th U.S. Circuit Court of Appeals, wrote that Judge Rhode’s Detroit decision raises issues of critical importance to its 1.7 million members, claiming that if a municipality in federal chapter 9 bankruptcy is allowed to break state laws and ignore its obligations to the pension system, it “may threaten the actuarial soundness of the system as a whole.” Calpers, in its brief, disputed Judge Rhodes’ view that “once a state authorizes its subdivisions to file bankruptcy, the state’s laws and constitution no longer control the actions of the municipal debtor,” arguing that Judge Rhodes’ decision nullifies §903 of chapter 9, which specifically preserves state laws governing municipalities―even in a bankruptcy proceeding: “In essence, the bankruptcy court decided a constitutional question, not because it was unavoidable, but because it believed that putting the issue behind would facilitate negotiations and administration of the case,” asking the 6th Circuit to issue a “narrow holding, taking into account the difference between state-run pensions and municipal-run pensions, given the different roles states and municipalities play in our constitutional plan,” should the court rule that the bankruptcy court was right in ruling that Detroit is eligible for Chapter 9 bankruptcy protection. See: In re Police and Fire Retirement System of the City of Detroit v. City of Detroit, 14-1208, 6th U.S. Court of Appeals.

Note: Calpers  is currently in confidential mediation, along with other creditors, in the San Bernardino Chapter 9 bankruptcy case, with San Bernardino and its creditors due to appear in the U.S. Bankruptcy court tomorrow before Judge for a status hearing. Calpers appealed San Bernardino’s eligibility to be in bankruptcy in U.S. Ninth Circuit Court of Appeals last December, and, last month, requested a continuance on the briefing schedule on that appeal. The court granted a postponement, so now Calpers expects to file an opening brief to May 19, with responding briefs from San Bernardino by June 20th.

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