By Bernie Woodall
DETROIT (Reuters) - Detroit's two public pension funds will file an objection on Monday to the city's bankruptcy filing on Michigan constitutional grounds, a representative of the pension boards said on Thursday.
The challenge expected from the pension funds is the first to emerge from among several parties likely to object to the city of Detroit's claim that it is bankrupt.
For Detroit's Chapter 9 bankruptcy to proceed U.S. Bankruptcy Judge Steven Rhodes, who is overseeing the case, must first find the city has proved it is insolvent and negotiated in good faith with its creditors, or that there were too many creditors to make negotiation feasible.
In a court filing earlier this month, Detroit released a list of creditors, including current, former and retired workers, that filled 3,504 pages. If Detroit is ultimately deemed eligible for municipal bankruptcy, it would be the biggest such case in U.S. history.
The city's two pension boards will claim that Michigan Governor Rick Snyder violated the state's Constitution when he allowed Detroit's state-appointed emergency manager, Kevyn Orr, to make the bankruptcy filing.
The pension boards also will claim Detroit violated state constitutional language that prohibits the impairment of vested retirement benefits for public workers, said Bruce Babiarz, spokesman for the Police and Firefighters Retirement System.
In a June 14 proposal to creditors, Orr called for "significant cuts in accrued, vested pension amounts for both active and currently retired persons."
Babiarz also said Monday's filing by the pension funds will include a provision seeking assurance that Judge Rhodes' approval of a city request to establish a committee to represent retired city workers during the bankruptcy process will not keep Detroit from negotiating directly with the pension boards.
Rhodes approved the creation of a creditors' committee August 2, despite concerns by trustees of the two pension boards that creation of a committee might undermine their ability to negotiate with the city, Babiarz said.
One of Detroit's pension boards manages the retirement system for Detroit's general service workers and the second one does the same for police and firefighters.
Orr claims that the unfunded liability of the two pension funds is five times what the pension funds claim.
Babiarz said representatives of Orr's office and the two pension boards will meet on Monday to discuss the retirement system's unfunded liability.
The constitutional arguments the pension funds are preparing appear similar to those made in lawsuits filed in state court aimed at derailing Detroit's bankruptcy. In a hearing on July 24, Judge Rhodes suspended those lawsuits and required all bankruptcy-related litigation to be heard in federal bankruptcy court.
The funds, along with creditors and other parties opposing Detroit's July 18 bankruptcy filing, have until 11:59 p.m. Eastern Time on Monday to file their objections with the U.S. Bankruptcy Court in Detroit. Judge Rhodes has set October 23 for the commencement of a hearing process to determine if Detroit is eligible to file under Chapter 9.
(Additional reporting by Karen Pierog in Chicago; Editing by Leslie Gevirtz)