May 1 Calpers, the country's largest pension fund, said on Thursday that Detroit's bankruptcy court was wrong to rule state law does not apply to bankrupt municipalities, a ruling that removed protection for the city's pension fund.
In a brief filed with the U.S. Court of Appeals for the Sixth Circuit, California Public Employees' Retirement System (Calpers) said the bankruptcy court misconstrued the Tenth Amendment and the limitations it places on a state's ability to consent to violations of state laws and constitutional provisions.
Detroit entered an $18 billion bankruptcy proceeding in December. Judge Steven Rhodes, who is overseeing the case, ruled that state law did not apply to the bankrupt city and pensions would be treated the same as other obligations.
Michael Sweet, a municipal bankruptcy attorney in San Francisco, said Calpers has a lot at stake in how public pensions are treated in the Detroit bankruptcy, especially if the city's public pensions end up being cut.
"While not binding on a bankruptcy judge in California, a decision by the 6th Circuit court in Detroit would certainly be persuasive to a judge applying the same federal bankruptcy law in a California case," Sweet said. "Furthermore, the next step after the 6th Circuit court in Detroit is the U.S. Supreme Court. If the Supreme Court ever rules on this, it would be the law of the land binding on all courts, including those in California."
In Stockton, Cali., another city in Chapter 9, the proposed plan to exit bankruptcy would leave pensions untouched. During a status hearing on Thursday, U.S Bankruptcy Court Judge Christopher Klein said his decision in Stockton's bankruptcy "would be just one more example on how Chapter 9 cases can go," and that if anyone really wanted to tackle pensions, "the U.S. Supreme Court would be involved."
Stockton's "exit plan" trial is scheduled to begin on May 12. (Reporting By Robin Respaut; Additional reporting by Tim Reid. Editing by Andre Grenon)