Professional Documents
Culture Documents
Pension Problem
MARISSA A. WIESEN*
INTRODUCTION
* Marissa A. Wiesen currently serves as a law clerk to the Honorable Tony M. Davis of the
United States Bankruptcy Court for the Western District of Texas. She is a 2014 graduate of the
University of Toledo College of Law, where she graduated magna cum laude and Order of the
Coif. Marissa earned her bachelors degree in political science from the University of Michigan
in 2008.
1
Monica Davey & Mary Williams Walsh, Billions in Debt, Detroit Tumbles Into Insolvency,
N.Y. TIMES, July 19, 2013, at A1, available at 2013 WLNR 17602180.
2 Michael A. Fletcher & Reid Wilson, Detroit Eligible for Bankruptcy Filing, WASH. POST, Dec.
4, 2013, at A01, available at 2013 WLNR 30383140.
3
4
5
6
7
Id.
Davey & Walsh, supra note 1.
Id.
Id.
Id.
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Khalil AlHajal, Unions, Retirees Prepare for Appeal After Detroit Ruled Eligible for Bankruptcy,
MLIVE (Dec. 3, 2013, 6:25 PM), http://www.mlive.com/news/detroit/index.ssf/2013/12/
unions_retirees_prepare_for_ap.html.
9 In re City of Detroit, Mich. (In re Detroit I), 504 B.R. 97, 11617 (Bankr. E.D. Mich. 2013)
(holding that the city did not show good faith, but meaningful negotiations were
impracticable because of the number of creditors involved and the lack of time with the city
running out of cash before the July deadline).
10
12
Elizabeth Blair, Grand Bargain Will Help Save Detroit And Its Art, NATL PUB. RADIO
(Nov. 7, 2014, 4:19 P.M.), http://www.npr.org/2014/11/07/362351942/grand-bargain-will-helpsave-detroit-and-its-art.
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15
Id.
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Background
A. Detroits Downfall
Detroit is insolvent now, but that was not always the case. 18 The
Motor City is the birthplace of the American automotive industry, and at
the height of its prosperity Detroit had over 1.8 million residents and built
half of the worlds automobiles.19 However, after its peak in the 1950s
Detroit experienced a substantial decrease in population. From 1950 to
2012, the population fell by over 63%.20 Consequently, tax revenues
plummeted.21 Income tax revenues have decreased by $91 million since
2002 and $44 million since 2008.22 Property tax revenues are decreasing at a
rate of 10% per year. 23 As of 2013, Detroit had operated at a deficit for
seven years and accumulated a debt of over $237 million.24 Without
restructuring, the city forecasts a negative cash flow of $190 million for
2014 and its deficit could grow to over $1.3 billion by 2017. 25
17 Mark S. Kaufman & B. Summer Chandler, The Looming Chapter 9 Battle over State
Protection of Vested Public Employee Pension Benefits, AM. BANKR. INST. J., Nov. 2013, at 14, 14.
18 Nathan Bomey & John Gallagher, How Detroit Went Broke: The Answers May Surprise
Youand Dont Blame Coleman Young, DETROIT FREE PRESS (Sept. 15, 2013, 1:10 AM),
http://www.freep.com/interactive/article/20130915/NEWS01/130801004/Detroit-Bankruptcyhistory-1950-debt-pension-revenue.
19
20
21
22
23
24
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26
Id. at 113.
Id.
28 Id. at 114.
29 Id. at 119.
30 See generally 11 U.S.C. 90146 (2012).
31 6 COLLIER ON BANKRUPTCY 900.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.
2010).
27
32 See Admin. Office of the U.S. Courts, Municipality Bankruptcy, U.S. COURTS,
http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter9.aspx (click
Courts Limited Power link) (last visited Nov. 3, 2014).
33 See generally FRANCIS J. LAWALL & GREGG MILLER, DEBT ADJUSTMENTS FOR
MUNICIPALITIES UNDER CHAPTER 9 OF THE BANKRUPTCY CODE: A COLLIER MONOGRAPH 7[1]
(2012).
34 See Leco Properties, Inc. v. R.E. Crummer & Co., 128 F.2d 110, 11213 (5th Cir. 1942); In
re Addison Cmty. Hosp. Auth., 175 B.R. 646, 649 (Bankr. E.D. Mich. 1994).
35
11 U.S.C. 930.
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45
Id. at 161.
See Notice of Appeal at 1, In re Detroit, Mich. (In re Detroit II), 504 B.R. 191 (2013) (No. 1353846).
46
47
48
49
Hannah Heck, Comment, Solving Insolvent Public Pensions: The Limitations of the Current
Bankruptcy Option, 28 EMORY BANKR. DEV. J. 89, 90 (2011).
50
51
Id. at 9495.
Kaufman & Chandler, supra note 17, at 14.
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52
54
55
56
57
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that do not exist under the Bankruptcy Code, they should be rejected as an
improper encroachment on the federal priority scheme.
A. The United States Constitution Establishes that Pension Impairment
in Chapter 9 Must Be Governed by Federal Law
Under the Bankruptcy Code, states have the power to authorize a
municipality to petition for bankruptcy, or to prohibit it.58 Under Michigan
law, the state is vested with the power to control whether or not a
municipality can enter into Chapter 9 bankruptcy. 59 Thus, it is well within
the power of the state to prevent federal bankruptcy law from interfering
with a states municipalities, which would prevent federal bankruptcy law
from impairing Detroit pension obligations.60
Under the Bankruptcy Clause, Congress is given authority to enact
uniform laws on the subject of bankruptcies, and the Bankruptcy Code
permits the impairment of contracts. 61 The conflicting Michigan
constitutional provision provides that pension benefits shall not be
diminished or impaired thereby.62 By allowing a city to petition for
Chapter 9 relief, the State of Michigan has submitted itself to the U.S.
Constitutions Supremacy Clause.
The Supremacy Clause provides that when a state law conflicts with
federal law, federal law prevails.63 Thus, because federal bankruptcy law
authorizes the impairment of municipal debts and obligations, it takes
precedence over the conflicting Michigan constitutional provision. 64
Accordingly, the Michigan Constitution can prevent its state legislature
from passing a law that impairs Michigan pension obligations, but it
cannot prevent Congress from passing a law doing so. 65
Those who support state constitutional provisions restricting the
impairment of contracts in bankruptcy argue that allowing a municipality
to impair contracts in light of a contrary state constitutional provision
infringes on a states rights under the Tenth Amendment. 66 However, states
are still permitted to control whether or not a municipality is permitted or
58
61
62
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64
65
66
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69
70
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72
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75
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which does impair it; whilst the states have not reserved the
power of bankrupt[cy] laws, and are expressly prohibited from
passing laws impairing the obligation of contracts. 76
76
77
78
79
80
81
82
83
84
85
Id.
298 U.S. 513, 530 (1936).
United States v. Bekins, 304 U.S. 27, 54 (1938).
Id.
403 B.R. 72, 75 (Bankr. E.D. Cal. 2009).
CAL. CONST. art. I, 9.
In re City of Vallejo, 403 B.R. at 75.
U.S. CONST. amend. X.
In re City of Vallejo, 403 B.R. at 75.
Id.
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86
90
In re City of Vallejo, 403 B.R. at 77; see also U.S. CONST. art. I, 8, cl. 4; U.S. CONST. art. IV,
cl. 2; U.S. CONST. art. VI, cl. 2.
91 In re City of Vallejo, 403 B.R. at 77.
92 In re County of Orange, 191 B.R. 1005, 1017 (Bankr. C.D. Cal. 1996); see also CAL. GOVT
CODE 27100.1 (West 2014).
93
94
95
96
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97
Id. at 14.
Id.
99 Id.
100 U.S. CONST. art. I, 10, cl. 1 (No State shall . . . pass any . . . Law impairing the
obligation of Contracts.); CAL. CONST. art. I, 9; In re City of Stockton, Cal., 478 B.R. at 15.
101 U.S. CONST. art. 1, 8, cl. 4; In re City of Stockton, Cal., 478 B.R. at 15.
102 In re City of Stockton, Cal., 478 B.R. at 15.
103 Id. at 16. See generally U.S. CONST. art. 1, 8, cl. 4.
104 In re City of Stockton, Cal., 478 B.R. at 16. See generally CAL. CONST. art. 1, 9.
105 In re City of Stockton, Cal., 478 B.R. at 16.
106 Id.; see also In re City of Vallejo, 403 B.R. 72, 7576 (Bankr. E.D. Cal. 2009); In re County
of Orange, 191 B.R. 1017, 1021 (Bankr. C.D. Cal. 1996).
98
107
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totality; it cannot cherry pick what it likes while disregarding the rest.108
When a state authorizes its municipality to file a [C]hapter 9 petition it
declares that the benefits of [C]hapter 9 are more important than state
control over its municipalities.109
C. Fair Treatment Among Creditors and Detroit Taxpayers Would Also
Be Impacted if Pension Obligations Could Not Be impaired
There is a strong policy argument in favor of the impairment of
pension obligations. What if the courts were to rule in favor of protecting
pensions? This would mean other bondholders would be required to bear
much more of the needed concessions.110 This would lead to the increased
cost of municipal credit for restructuring the city and otherwise. 111 This
would not be good for the municipal bond market in the long run and
would likely cause credit spreads to widen.112 Such a payment plan
protecting retired workers pensions over other bondholders would also
create a mentality in the State of Michigan that pits citizens against those
who loaned to the city.113
Furthermore, what is equitable for the 9,000 current city employees
who could see their pension contributions completely lost in order to save
the pensions of those already retired? Should these current employees
suffer to insulate former colleagues?114 Often, when a locality falls into
distress, it raises taxes as high as necessary to make full payments on
bonds.115 If constitutional protections for pensions were valid in the face of
Chapter 9, it would elevate what is fair to retired workers over what is
affordable to taxpayers. In a city that is already suffering from a declining
population, decrepit infrastructure, and dismal health and safety services,
should taxpayers really see increased taxes to support retired workers?
Detroit is attempting to rebuild and strengthen its community and cannot
afford to further divide and alienate its citizens. While this may seem like a
harsh result for citizens who have served the city and now live on fixed
incomes, it is the right sacrifice for the city to move forward.
108
In re City of Vallejo, 403 B.R. at 75 (quoting In re County of Orange, 191 B.R. at 1021).
Id.
110 See Eide, supra note 53.
111 Kaufman & Chandler, supra note 17, at 80.
112 Chris Christoff & Brian Chappatta, Detroit Bankruptcy Exit Plan Threatens Munis as
Pensions Favored, BLOOMBERG PERS. FIN. (Feb. 1, 2014, 12:00 AM), http://www.bloomberg.com/
news/2014-01-31/detroit-bankruptcy-exit-plan-favors-pensioners-over-bondholders.html.
113 Id.
114 Chad Halcom, Pensions in Play in Detroit Bankruptcy: Whats Equitable?, CRAINS DETROIT
BUS. (Dec. 8, 2013, 8:00 AM), http://www.crainsdetroit.com/article/20131208/NEWS/312089960/
109
pensions-in-play-in-detroit-bankruptcy-whats-equitable.
115 Christoff & Chappatta, supra note 112.
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116 Jeffrey B. Ellman & Daniel J. Merrett, Pensions and Chapter 9: Can Municipalities Use
Bankruptcy to Solve Their Pension Woes?, 27 EMORY BANKR. DEV. J. 365, 367 (2011).
117 See The Role of Public Employee Pensions in Contributing to State Insolvency and the
Possibility of a State Bankruptcy Chapter: Hearing Before the Subcomm. on Courts, Commercial and
Admin. Law of the H. Comm. on the Judiciary, 112th Cong. 47 (2011) (statement of Joshua Rauh,
Associate Professor of Finance, Kellogg School of Management, Northwestern University)
([U]sing valuation methods and accounting practices that are consistent with financial
economics, . . . the already-promised part of these unfunded liabilities actually amounts to
over $3 trillion . . . .).
118
See Gina Chon, Private Firm Pensions Face Costly DeadlineBusinesses and Charities Seek an
Extension on Funding Targets; Cutting Expenses at Easter Seals, WALL ST. J., Apr. 1, 2010, at C3
(reporting that the average funding level for public pension plans was 65% as of the end of
2009).
119
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121 Timothy S. Bishop et al., Tips on Petitioning for Certiorari in the U.S. Supreme Court, THE
CIRCUIT RIDER, June 2007, at 28, 30, available at http://www.mayerbrown.com/
files/Publication/34891e80-a15d-4b25-84a2-d3c8573d23da/Presentation/PublicationAttachment
/5f64270f-6be0-4cec-8cc8-10e6bed6988b/ART_CIRCUITRIDER_JUN07.PDF.
122 U.S. CONST. amend. X.
123 Charles Tabb, Detroits Chapter 9 Bankruptcy and the Grinch Who Stole Their Pensions,
JURIST (Dec. 23, 2013, 12:11 PM), http://jurist.org/forum/2013/12/charles-tabb-detroitbankruptcy.php.
124
See id.
Id.
126 See LA. CONST. art. X, 29, cl. AB; N.Y. CONST. art. V, 7.
127 Bishop et al., supra note 121.
128 See Tabb, supra note 123.
129 Marina Koren, What Bankruptcy Means for Detroit Residents, NATL J. (Dec. 3, 2013),
http://www.nationaljournal.com/budget/what-bankruptcy-means-for-detroit-residents20131203.
125
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130
133
Ashton v. Cameron Cnty. Water Improvement Dist. No. One, 298 U.S. 513, 530 (1936).
Printz v. United States, 521 U.S. 898, 899 (1997); New York v. United States, 505 U.S.
144, 144 (1992); United States v. Bekins, 304 U.S. 27, 28 (1938).
135 Petition for Writ of Certiorari at 7, Printz v. United States, 521 U.S. 898 (1997) (Nos. 951478, 95-1503), 1996 WL 33413759.
134
136
Id. at 1.
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CONCLUSION
Underfunded pension obligations constitute one of the most
significant problems facing municipalities across the country.142 For
municipalities like the City of Detroit that are crippled with overwhelming
pension obligations, Chapter 9 offers relief. However, the ability to
137
138
139
140
141
142
See id. at 7.
Id.
See Sturges v. Crowninshield, 17 U.S. 122, 191 (1819).
See supra Part II.
See supra Part II.
Ellman & Merrett, supra note 116.
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