I have a post up at Reason.org called “Pension Protection and the Detroit Bankruptcy“. Here are some excerpts:
In previous posts, I’ve discussed how public employee pensions are protected by the Contract Clause of the federal and state constitutions, and I’ve explained the intricacies of constitutional provisions like that in California. It turns out that constitutional pension protections interact interestingly with bankruptcy law, as we’re finding out in the ongoing Detroit bankruptcy.
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The city of Detroit couldn’t pay its bills, and so, on July 18, 2013, it declared bankruptcy under Chapter 9 of the federal Bankruptcy Code, the chapter reserved for municipalities. . . .
Many parties filed objections to the bankruptcy in federal bankruptcy court. On December 5, 2013, bankruptcy judge Steven Rhodes issued an opinion taking up about 95 pages of the Bankruptcy Reporter and discussing over a dozen separate state and federal legal theories, including federal constitutional objections to Chapter 9 on federalism grounds, federal constitutional objections to the use of bankruptcy courts (which are executive tribunals, as opposed to regular courts) on separation-of-powers grounds, a variety of state constitutional claims, and a variety of claims under Michigan law, including challenges to the authority of the emergency manager, as an unelected official, to file for bankruptcy.
Judge Rhodes rejected all the arguments and concluded that the city was eligible to file for Chapter 9 bankruptcy; this post will focus solely on the arguments related to public-employee pensions (somewhat reorganized for greater comprehensibility).
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When municipalities enter bankruptcy, they know that they won’t be able to prevent pension obligations (or contract obligations generally) from being impaired. So perhaps municipalities’ doing so might violate Michigan’s Pension Clause (and/or Michigan’s Contract Clause)? . . . [T]he federal Bankruptcy Code itself requires municipalities to have state authorization (from a statute or from a state officer) before they can file for Chapter 9; and some states in fact expressly forbid their municipalities from filing for Chapter 9. So it’s not crazy to think that a state constitutional provision could have the same effect.
You can read the whole thing here; for more of my work on public-employee pensions, see my Federalist Society white paper, Overprotecting Public Employee Pensions: The Contract Clause and the California Rule. Also, here’s a link to my collected blog posts on public employees. For those who are interested in municipal bankruptcy issues (even if it’s not my own work!), see David Skeel’s Federalist Society white paper, Can Pensions be Restructured in (Detroit’s) Municipal Bankruptcy?
Additionally, here’s a link to my other (roughly monthly) Reason.org blog posts on various issues related to privatization and public employees. For instance, I have a number of blog posts on antitrust issues related to the public-private distinction — i.e., the state-action doctrine — in connection with the Phoebe Putney and Dental Examiners cases.