Detroit, Retirees Square off over Bankruptcy Move

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The city of Detroit is defending its right to file for bankruptcy in federal court Wednesday. Lawyers for the city are seeking to block a series of lawsuits so the city can slash its crippling debts.

At the heart of the issue: pensions.

Detroit promised the benefits to thousands of retirees, but the money to pay up isn't there. The city is about $18 billion in debt and has a pension shortfall of $3.5 billion.

Bill Frezza from the Competitive Enterprise Institute said pension reform is a necessity if Detroit is going to recover.

"It's going to be painful for a lot of people, but continuing to kick the can and deny reality can only lead Detroit toward what we're seeing in Greece," Frezza warned.

But city workers, retirees and pensioners are suing the city, claiming that filing for bankruptcy violates the state constitution, which guarantees pension benefits will be paid in full.

Last week, a Michigan circuit court judge sided with the pensioners.

"There's been a violation of the Constitution," Ingham County Circuit Judge Rosemarie Aquilina said. "I don't think the Constitution should be made to be Swiss cheese. Once we erode it with one hole, there will be others."

Now the federal court is weighing in.

U.S. bankruptcy Judge Steven Rhodes will consider Detroit's request to put on hold all lawsuits filed against the city before it filed for bankruptcy.

The legal question at the heart of Detroit's bankruptcy filing has never been answered in the nation's high courts. But this case could be crucial considering how many other cities are heading in the same direction.

Frezza says for many of those cities it's already too late.

"If you look at the dollars and operating costs that are going toward most of these cities, there's no way to turn them around," he said. "They might be able to slow things down, but there's got to be a reckoning and both municipal bond holders and pensioners have to take a haircut.

For now, all eyes are on Detroit as it's decided just how far the U.S. bankruptcy code goes and whether it trumps state law.

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