Michigan's Attorney General Bill Schuette, a Republican, said on Saturday he would defend retirees who risk losing public pensions because of Detroit's bankruptcy, putting him at odds with the city's emergency manager appointed by fellow Republican Governor Rick Snyder.
Schuette, an elected official, said the Michigan state constitution is "crystal clear" in stating that pension plans are a contractual obligation that may not be diminished or impaired.
"Retirees may face a potential financial crisis not of their own making, possibly a result of pension fund mismanagement," Schuette said in a statement.
The attorney general said he would file in federal bankruptcy court on Monday on behalf of the pensioners affected by the biggest municipal bankruptcy filing in U.S. history.
A U.S. bankruptcy court judge on Wednesday dealt a blow to Detroit's public employee unions and pension funds opposed to the filing by suspending legal challenges in Michigan state courts while he reviews the city's petition for protection from creditors.
The city's unions and pension funds had hoped to keep the fight in state court, where they felt Michigan's constitutional protections of retiree benefits would prevail against any efforts by state-appointed Detroit Emergency Manager Kevyn Orr to scale them back.
Judge Steven Rhodes ordered three lawsuits filed by city workers, retirees and pension funds halted and said that applied also to suits against Orr as well as Michigan's governor and treasurer.
In a June 14 proposal to creditors, Orr called for "significant cuts in accrued, vested pension amounts for both active and currently retired persons."
A spokesman for Orr said on Saturday the bankruptcy court would have the final say on the pension issue.
"The emergency manager plans to establish the city's eligibility to file for Chapter 9 bankruptcy protection and then move as swiftly as possible to propose a plan of adjustment that will help create a strong and viable Detroit and will enable the city to provide essential public services to its 700,000 residents," Orr spokesman Bill Nowling said in an emailed statement.
Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry, filed for bankruptcy protection on July 18.
The city has struggled for decades with companies moving or closing, rampant crime, shrinking population and political corruption. The city's revenue failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing to stay afloat.
Detroit has more than $18 billion of debt and unfunded liabilities. That includes $5.7 billion in liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability.
Schuette said he would continue to represent governor Snyder and state agencies in legal proceedings related to the bankruptcy, even though he is taking a different view on the pension issue.
In an emailed statement, Snyder's press secretary Sara Wurfel said the governor's office expects that Schuette will "vigorously defend" its efforts as well.
"Our response is that this is an important issue, and we appreciate and support efforts to get clarity and help determine the best path moving forward that respects and is fair to pensioners and all parties," Wurfel said.
(Reporting by Susan Kelly in Chicago; editing by Gunna Dickson)