Detroit pensions are city liabilities, not state liabilities
There seems to be confusion among legislators over the state's possible responsibility for Detroit pension underfunding.
In the Senate committee hearing on the Detroit bailout bills, Senator Dave Hildenbrand, R-Grand Rapids, expressed concern that the state would be liable for the city pension liabilities if it does not approve the bailout package.
In The Detroit News, House Speaker Jase Bolger, R-Marshall, said: "All taxpayers face the risk of Detroit's unfunded liabilities. Attorney General Bill Schuette has argued that the $3.5 billion in pension liability cannot be reduced."
However, in his appeal of Detroit's bankruptcy eligibility, the Attorney General argues that Detroit pensions are city liabilities, not state liabilities.
In the brief, the Attorney General stated that the city must meet all pension obligations, regardless of what the bankruptcy court ruled. He began by acknowledging the basis for the bankruptcy court's ruling:
Based on its review of Michigan law, the bankruptcy court determined that there is no protection afforded accrued financial benefits in bankruptcy. It construed Michigan law to provide only that the Pension Clause created a mere contractual relationship between the City and retirees. The bankruptcy court held that if the Michigan Supreme Court were faced with the issue of whether Chapter 9 of the Code violates the U.S. Constitution, Article X, that that Court would conclude that the Pension Clause merely affords 'pension rights the protection of contract rights.' Similarly, the bankruptcy court held that Public Act 436 of 2012 does not violate the Pension Clause because 'under the Michigan Constitution pension rights are afforded only the protections of contract rights.'
The Attorney General then claimed that if the "grand bargain" is not approved, he will have to defend the constitutional provision, regardless of what the bankruptcy court held:
If, on the other hand, the pensioners choose to reject the grand bargain and the $800+ million pension contribution, it is the Attorney General's duty to uphold and defend the Michigan Constitution. And as the Attorney General's previous filings have explained, art. IX, § 24 of Michigan's Constitution limits the City's ability to discharge vested pension liability, a limitation that the bankruptcy process incorporates under 11 U.S.C. §§ 903 and 904. Michigan's Constitution cannot be disregarded or ignored.
But he acknowledged that the state has no responsibility to pay the shortfall:
It is important to note that the pension obligation runs to the City — not the State — because in this situation the Pension Clause binds only the City for the City's retirement system. As a result, the State has no obligation to pay the pension deficit if the City cannot meet its obligations under its retirement system.
What the Attorney General argues is that regardless of what the bankruptcy court does, Detroit has to pay the pensions in full. But it is Detroit, rather than the state, that is obliged to make these payments.
This is a unique legal matter that has not come up in previous municipal bankruptcies. The bankruptcy judge ruled that our constitutional provision establishes a contract, and that bankruptcy can rewrite or abrogate such contractual rights as earned pensions. It remains to be seen whether this view will stand.
Regardless of the final outcome, it is a misrepresentation of Schuette's brief to argue that the Attorney General believes that Detroit's underfunded pensions are the state's responsibility. The state bailout should not be made based on fears of an additional $3.5 billion liability.