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AARP Joins Fight to Protect Detroit Pensions in Bankruptcy

AARP’s brief argues that the bankruptcy court’s ruling that the federal bankruptcy code trumps Michigan’s constitutional pension protections should be reversed.

After the City of Detroit filed for bankruptcy protection, the bankruptcy court held that the City is eligible to discharge accrued pension benefits and that the bankruptcy law trumps the explicit pension protections in Michigan’s Constitution.

AARP filed a friend-of-the-court brief in the appeal of the ruling by U.S. Bankruptcy Judge Steven Rhodes that pensions are a contractual obligation “not entitled to any heightened protection in bankruptcy.” Seven groups of creditors, including unions and retirees, filed separate appeals of that ruling to the U.S. Sixth Circuit Court of Appeals.

In its brief, AARP relied on the voter-approved 1963 Michigan Constitution which expressly protected from cuts state and municipal employees’ pension benefits. Because the retirees’ pensions are a form of deferred compensation, and that as employees they accepted lower wages in exchange for pension benefits they believed would provide economic security in retirement, those pensions should be protected under the state constitution. Cuts to the retirees’ modest pensions amount to Detroit reaching its hand into someone’s bank account and taking money out.

AARP argued that the City’s proposed reduction or elimination of cost of living adjustments for retirees will erode retirees’ ability to keep pace with inflation. AARP notes the deep hit retirees already took to promised health care benefits, resulting in Detroit retirees paying more for less coverage.

Combined, the cuts will push many retirees below the poverty line, which is harmful for Detroit’s recovery. AARP urged reversal of the court’s rulings that the federal bankruptcy code trumps Michigan’s constitutional pension protections.

What’s at Stake

This is the first appellate case to address the interrelationship of bankruptcy law and state constitutional protection of pensions. This decision could affect workers and retirees expecting pensions from other municipalities and states with financial problems.

Case Status

In re City of Detroit, Debtor in possession is before the U.S. Court of Appeals for the Sixth Circuit.