In the ongoing saga of the biggest municipal bankruptcy in U.S. history, a federal judge cleared the way Tuesday for Detroit to declare bankruptcy and shed $18 billion in debt, declaring the Motor City “was and is insolvent” and it is a “foregone conclusion” that it cannot meet its financial obligations.
U.S. Bankruptcy Judge Steven Rhodes rejected claims from city workers that the city could not declare bankruptcy because their pensions were guaranteed under Michigan law.
“It is indeed a momentous day,” Judge Rhodes wrote. “We have here a judicial finding that this once proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start. I hope that everybody associated with the city will recognize that opportunity.”
Detroit’s bankruptcy, which also cancels debts to a number of financial creditors besides pensioners, will free the city of servicing a debt that has prevented it from such basic tasks as keeping up the police force, offering timely garbage pickup, fixing broken streetlights, and dealing with thousands of abandoned homes.
Emergency Manager Kevyn Orr said Detroit would “press ahead,” adding that he expects to submit a plan of adjustment by the first week of January, well before the judge’s March 1 deadline, and exit bankruptcy protection by the end of September.
Detroit filed for bankruptcy in July, four months after Michigan Gov. Rick Snyder brought in Mr. Orr as the city’s emergency manager. The city’s nine-day bankruptcy trial ended on Nov. 8.
“Time is of the essence, and we will continue to move forward as quickly and efficiently as possible,” Mr. Orr said in a statement. “We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens.”
But the plan will likely include controversial cuts to pension funds and retiree health care packages, which would result in city employees losing billions of dollars they had been promised,
“It’s a huge loss for the city of Detroit,” said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees.
Ms. Levine, who represents Detroit pensioners, told reporters that her union will do “everything we can” to protect pensions.
Lynn Brimer, an attorney for the Retired Detroit Police Members Association, told reporters “the fight has just begun.”
In addition to slashing its debt, the city is also considering selling off such assets as the water department and some of the masterpieces at the Detroit Institute of Arts.
Judge Rhodes agreed with a key contention of the pensioners — that the city of Detroit did not negotiate in “good faith” before filing for bankruptcy on July 18. But he also noted that it would have been nearly “impossible” for Mr. Orr to do so, because the city has more than 100,000 creditors with competing interests.
The judge’s ruling now opens the door for Mr. Orr to negotiate a pension deal with the city’s current and former employees. The pension funds of about 23,000 retirees and 9,000 workers are short by $3.5 billion, according to Mr. Orr, and they will likely be left with just pennies on the dollar.
Judge Rhodes said he would open the door for a cut to the pension funds, but he warned Mr. Orr that he would not “lightly or casually” approve just any deal, but only one that he deemed fair.
Detroit Mayor Dave Bing said he hoped the judge’s ruling “gives us a chance today to move forward with a clean slate and make good decisions that will improve the quality of life for Detroit.”
“We can’t think bankruptcy is the worst thing that ever happened to us,” he said at a Tuesday afternoon news conference.
Mr. Snyder also said the bankruptcy will help Detroit move forward.
“We need to recognize that this decision is a call to action,” Mr. Snyder said. “We are confronting fiscal realities that have been ignored for too long.”
• Tim Devaney can be reached at tdevaney@washingtontimes.com.
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