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Detroit bankruptcy tests state pension protections

Firefighters protest outside the federal courthouse in Detroit,

Firefighters protest outside the federal courthouse in Detroit, as the city's bankruptcy hits a courtroom for the first time, with a judge considering what to do with challenges from retirees on behalf of their pensions. (July 24, 2013) Credit: AP

The federal judge overseeing Detroit's bankruptcy ruled Wednesday that city employees could not go to state courts to keep their pensions out of the bankruptcy case.

Bankruptcy Judge Steven Rhodes said he would hear the pensioners' arguments in his court.

Those pensions are at the heart of Detroit's bankruptcy filing, the largest for a municipality in U.S. history. The city's financial future may hinge on whether the city is obliged to its past, or whether it can renege on its promises to thousands of retirees for the sake of its present city services.

Some cities, like Detroit, are located in states where pension benefits are guaranteed in full according to state constitutions, statutes or court precedent. Yet Detroit's emergency manager is asserting that those guarantees go away in federal bankruptcy court, leaving retirees in the same pool as numerous other creditors who may get mere cents for each dollar they are owed.

"There's not a lot of previous case law that tells us what's going to happen here," said Paul Secunda, a Marquette University law professor who specializes in labor and benefits issues. "Can a federal bankruptcy court basically ignore a state constitutional provision and allow a city like Detroit to ignore its previous promises concerning public employee pensions?"

The question matters because pensions pose a major liability for states, counties, cities, schools and other local governmental entities.

Republican Michigan Gov. Rick Snyder and Detroit emergency manager Kevyn Orr contend that retiree benefits should be able to be trimmed along with other debts to restore the city's finances. Detroit has about 21,000 retired workers who are owed benefits, with underfunded obligations of about $3.5 billion for pensions and $5.7 billion for retiree health coverage.

But union representatives contend retiree benefits already have been earned and shouldn't be part of the discussion in bankruptcy court.

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