Can Pensions Be Restructured in (Detroit’s) Municipal Bankruptcy?

Abstract

This paper, which was written as a White Paper for the Federalist Society, describes and assesses the question whether public employee pensions can be restructured in bankruptcy, with a particular focus on Detroit. Part I gives a brief overview both of the treatment of pensions under state law, and of the Michigan law governing the Detroit pensions. Part II explains the legal argument for restructuring an underfunded pension in bankruptcy. Part III considers the major federal constitutional objections to restructuring. Part IV discusses arguments based on the Michigan Constitution and Part V assesses several Chapter 9 arguments against restructuring. None of these arguments appear to prevent restructuring. Assuming that pensions can in fact be restructured, Part VI discusses the Chapter 9 factors that may affect the extent to which they are or can be restructured in a particular case.

Keywords: Municipal bankruptcy, retirement security, state and local government law, constitutional law, defined benefit public employee pensions, contract approach, Contracts Clause, Chapter 9, Detroit, pension restructuring, Michigan Constitution, accrued benefits, property interest, Takings Clause

JEL Classification: H75, H77, K19, K39