In 2011, the City of Flint had a deficit of $25.7 million although Michigan law requires local governments to balance their budgets. Over the following years, the City took a number of steps to both increase revenue, such as by increasing various fees, and to reduce expenses, by reducing its work force and reducing salaries. Nevertheless, the City remained at a deficit. 

As a result, in 2012 the City’s Emergency Manager imposed a series of orders modifying the City’s health and welfare benefits for its retired former employees, which had previously been collectively bargained and/or were the subject of prior City ordinances. These changes included: (1) terminating coverage for retirees if their spouses were eligible to receive paid coverage through a current or former employer; (2) reducing the number of available insurance providers, which had the effect of increasing deductibles, co-payments, and coinsurance; and (3) requiring retirees to enroll in and pay for Medicare Supplemental Part B. 

The City argued that if it was not permitted to enforce these changes, it would have to find another way to immediately reduce its expenses by $3.5 million. The City’s position that this would be required to find that money in its public safety budget, which was particularly problematic because the City had been ranked as the most violent city in the country. 

Plaintiffs, who are class representatives, filed a lawsuit in the United States District Court for the Eastern District of Michigan and sought a preliminary injunction preventing the City from imposing those changes. Plaintiffs claimed that the changes to their benefits impaired their respective contracts and collective bargaining agreements in violation of the Contract Clause of the U.S. Constitution. The District Court granted that injunction and Plaintiffs appealed. 

After determining that the Emergency Manager’s action constituted a “legislative action,” thereby invoking the Contract Clause, the Court then turned to the question of whether the plaintiffs had shown a likelihood of success on the merits. Under Sixth Circuit law, this showing is made “if the plaintiff has raised questions going to the merits so serious, substantial, difficult, and doubtful as to make them a fair ground for litigation and thus for more deliberate investigation.” Six Clinics Holding Corp., II v. Cafcomp Sys., Inc., 119 F.3d 393, 402 (6th Cir. 1997). 

In order to prevail on a Contracts Clause claim, a plaintiff must prove that there was a substantial impairment of a contract. At that point, the burden then turns to the state to prove both a significant and legitimate public purpose underlying the impairment and that the impairment was reasonable and necessary to serve that purpose. 

The Sixth Circuit agreed that the impairment was substantial because of the strain the increased costs would put on the plaintiffs. However, the Court also found that the impairment was intended to serve a significant and legitimate public purpose, namely to resolve the City’s dire financial circumstances. 

Turning to the final requirement for a Contracts Clause claim, the Court noted that impairment of a contract is only deemed to not be necessary if a less drastic step would have allowed the contract to remain unimpaired. The Sixth Circuit held that the District Court had not abused its discretion in determining that the City had failed to meet that standard because the City had not considered alternative ways of addressing the deficit. 

The Court held that the plaintiffs had satisfied the other requirements for a preliminary injunction, including that they would be irreparably harmed, notwithstanding the availability of money damages if they ultimately prevailed, because of the possibility that plaintiffs’ medical care could be compromised. The final consideration was whether the injunction would harm the public at large. The Court noted this was a close question given the possibility that the public safety budget would be reduced. However, the Court held that there was a sufficient basis for the District Court to conclude that the City had other options to balance its budget such that the District Court abused its discretion. 

This case stands as another reminder of the difficulties that state and local governments face in changing their employee and retiree benefit plans despite ongoing budget shortfalls. In a number of states, it is significantly more difficult for state and local governments to change their employee benefits than it is for private employers. The result of this situation is that a growing number of municipalities are likely to follow the lead of Detroit, which last year became the largest municipal bankruptcy in U.S. history. It may only be by filing bankruptcy that local governments can find the flexibility they need to reduce their benefit costs. 

The case is Welch v. Brown, No. 13-1476 (6th Cir. Jan. 3, 2014).