18 July 2013

Detroit pension funds sue to block potential bankruptcy

Originally Appeared in The Detroit News

Detroit — -- The city's two pension funds sued Gov. Rick Snyder on Wednesday to block him from authorizing what would be the biggest municipal bankruptcy in U.S. history.

The Ingham County Circuit Court lawsuit says authorizing a Detroit Chapter 9 bankruptcy would violate retirees' constitutional right to a pension.

The General Retirement System and Police & Fire pension fund lawsuit could be combined with a similar complaint filed by retirees earlier this month that also seeks to block a bankruptcy filing.

An attorney for three retirees and two city workers vested in the Detroit retirement system who are plaintiffs in the earlier case welcomed the pension funds' joining the legal battle.

"The more the merrier," said Bingham Farms attorney Bill Wertheimer, who is being paid by the United Auto Workers.

The new lawsuit is the latest step in an escalating fight between the pension funds and Emergency Manager Kevyn Orr, who wants to cut pensions and benefits while restructuring as much as $20 billion in city debt.

The pension funds aren't alone in eying the lawsuit as an option to block a Detroit bankruptcy filing. Several labor unions are interested in joining the lawsuit, said Wertheimer.

That lawsuit claims the emergency manager's power to alter or wipe out vested pensioners in a bankruptcy violates Michigan's constitutional protection of accrued pension benefits.

Under the new emergency manager law, if Orr concludes there's "no reasonable alternative to rectifying" Detroit's financial emergency, he must get Snyder's approval to seek Chapter 9 bankruptcy protection.

The law, which took effect in March, contains no timetables or waiting periods.

The pension funds were prepared to fight Orr as the city's finances continued to erode.

They set aside $5 million to fund a legal fight and any attempts by Orr to takeover a system with $5 billion worth of assets.

As part of Orr's restructuring plan, he is proposing to slash pensions and health benefits.

The Michigan Constitution protects benefits for the city's 30,000 current and former city workers, but it's unclear whether a bankruptcy judge would rule otherwise.

Under state law, Orr can replace pension board members if a review determines the funds are underfunded. There is wide disagreement about the funds' financial soundness.

Orr contends that the city's retirement system is underfunded by an estimated $3.5 billion. Pension officials dispute the figures.

An Orr-commissioned review of both funds will be completed soon, said Bill Nowling, the emergency manager's spokesman. If the pension systems are less than 80 percent funded, Orr can try to remove the boards and have state Treasurer Andy Dillon appoint a sole trustee.

Orr also recently launched an investigation of the pension funds amid concerns over mismanagement, investments and spending.

The general pension fund is likely less than 80 percent funded, said Michael VanOverbeke, the fund's interim general counsel. A preliminary report on the police and fire fund pegged its funding level at 96.1 percent, though Orr has said both funds are below 80 percent.

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