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Detroit bankruptcy filing unconstitutional, judge rules

Toronto Star
Friday, 19 July 2013

Detroit bankruptcy filing unconstitutional, judge rulesA Michigan judge demanded that the largest bankruptcy filing ever made in the United States be withdrawn Friday on the grounds that it is unconstitutional.

Detroit owes about $18 billion to an estimated 100,000 creditors, and on Thursday the Motor City’s emergency fiscal manager Kevyn Orr sought Chapter 9 bankruptcy protection.

A day later Ingham County Circuit Court Judge Rosemarie Aquilina ruled that the bankruptcy filing would be devastating to thousands of city pensioners and it must be reversed.

Aquilina said on Friday that the state law passed by the Michigan legislature that allowed Gov. Rick Snyder to approve the bankruptcy violates the state constitution and that the governor lacks the power to “diminish or impair pension benefits.”

About $9 billion of Detroit’s debt is owed to retiree pension funds and benefits. The bankruptcy filing, carried out late Thursday, angered union representatives, who said city officials’ courthouse move had blindsided them.

Under U.S. law, Chapter 9 bankruptcy protection means there will be a competition by creditors for the limited assets Detroit has to offer. Pension fund lawyers, arguing before Aquilina, had desperately tried late Thursday to delay the bankruptcy filing.

The unions did manage to get a restraining order from the judge to stop further actions to cut pension benefits, the Detroit Free Press reports.

And according to a report in the Wall Street Journal, Orr directed officials Thursday to investigate the city’s two pension funds and look for “waste, abuse, fraud or corruption, including but not limited to, administrative misfeasance or other impropriety.”

If there are problems, the city could take over the pension system, which could make it easier for pensioners to accept concessions proposed by Orr to save Detroit money, the Journal reported.

Insufficient pension funding is at the heart of Detroit’s financial woes. The city currently owes $3.5 billion on its pension fund and another $5.7 billion in unfunded retiree health care liabilities, according to the Free Press.

And for years there have not been enough workers contributing to the general retirement system to make up the shortfall. In 2011, Free Press data for one of the plans showed 61 per cent of former city workers were drawing on it and only 39 per cent were contributing.

Detroit’s bankruptcy filing shook America. The city, the cradle of the enormous auto industry, had been a 20th-century economic powerhouse.

But it isn’t the only U.S. city with serious pension problems. Earlier this month, Moody’s Investors Service said states and municipalities have run up $2 trillion in unfunded pension liabilities, Reuters reports.

Up till this week, Stockton, Calif. had been the largest U.S. city to file for bankruptcy. It plans to reduce employee compensation and retiree benefits by $11.2 million, Reuters said.

According to Governing magazine, there have been 36 municipal bankruptcy filings since the start of 2010. Some of those include California’s San Bernardino, Alabama’s Jefferson County and Rhode Island’s City of Central Falls.

There are 701,475 people living in Detroit, according to census data. What had once been the heartland of the once powerful U.S. automotive industry went through hard times after General Motors filed for bankruptcy in 2009 and had to be bailed out by taxpayers, both north and south of the border.

Snyder, the state governor, said Detroit’s bankruptcy filing was “a last resort to turn this great city to financial and civil health for its residents and taxpayers.”

“I know many will see this as a low point in the city’s history,” he wrote in the letter to the court. “If so, I think it will also be the foundation of the city’s future — a statement I cannot make in confidence absent giving the city a chance for a fresh start, without burdens of debt it cannot hope to fully pay.”

*With files from the Star wire services*
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Source: Newsy.com - on July 22, 2013

News video: Detroit Officials Defend Bankruptcy Filing on Sunday Shows

Detroit Officials Defend Bankruptcy Filing on Sunday Shows

Governor Rick Snyder and other officials say the historic bankruptcy filing is out of necessity.

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