Detroit Bankruptcy Constitutional Issues

Bankruptcy proceedings underway in Detroit will go a long way in determining what path cities might take in reducing unsustainable pension benefits. Attorneys for the City of Detroit are taking an aggressive stance in arguing that the city has standing in federal bankruptcy court.  However, the key issue of pension "impairment" is not addressed directly by the city's filing.  City lawyers skirted the constitutional issue of pensions by arguing in their filing that no impairment of pensions has yet been taken by their filing.  An excerpt from Michigan's constitution highlights the conundrum:

§ 24 Public pension plans and retirement systems, obligation.
Sec. 24. The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

One would think this is case closed, the state of Michigan, through its constitution, is now on the hook for Detroit's pensions.  However, this case has a federalist element.  The bankruptcy was filed under federal bankruptcy laws.  Was it the intent of Congress in passing the bankruptcy laws to supplant state constitutions?  If so, under the Supremacy Clause in Article VI, the city's lawsuit should be heard and trump federal law.  There is an entire section of the bankruptcy code devoted to municipalities, Chapter 9.  Pensioners are arguing that the courts must first hear constitutional issues before the bankruptcy hearing can proceed and have moved to remove the case out of bankruptcy court to district court.

Since I am not a lawyer, I turn to the analysis of University of Pennsylvania law professor David Skeel, to make the case.  From the WSJ:

Article IX, Section 24, of the Michigan state constitution says: "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby." Yet Chapter 9 of federal bankruptcy law clearly authorizes a city to restructure its obligations to restore financial health. How will the conflict be resolved?

Chapter 9 should prevail. The U.S. Constitution (Article VI) states that the laws of the United States are "the supreme law of the land," and furthermore, that judges in every state are bound by them, "anything in the constitution or laws of any state to the contrary notwithstanding."

Seem clear enough to me.  Here is some more perspective.

Seven states have specific clauses in their constitutions that protect public employee pensions: Alaska, Arizona, Hawaii, Illinois, Louisiana, Michigan, and New York.

Some of these states might eventually have the biggest bankruptcies from pension obligations.  Without at least the threat of bankruptcy, I don't think unions are ever going to back off from claims that the constitution protects retiree benefits, even if there are no taxpayers left to foot the bill.

Who's going to pay for the pensions now?