Saying that “the city needs help,” a judge ruled Tuesday that Detroit is eligible for bankruptcy protection and can cut municipal employee pensions as it reorganizes its finances.
“This case was filed in good cause and should not be dismissed,” Judge Steven Rhodes of U.S. Bankruptcy Court said, to the disappointment of pensioners and other creditors, who had raised a host of objections to the city’s Chapter 9 bankruptcy filing in July.
The ruling makes Detroit, burdened with $18 billion in debt, the largest U.S. city to be granted bankruptcy protection.
The city will now be asked to present a disclosure statement, which is an outline of a reorganization plan. It could do so by the end of the year. Creditors will weigh in on the statement, and Rhodes will rule on it. Detroit has said it hopes to emerge from bankruptcy by 2014.
To be eligible to reduce its debts in bankruptcy proceedings, Detroit had to show that it was insolvent and that it had negotiated in good faith with creditors before the filing.
In making his ruling Tuesday, Rhodes said the city had proved it is insolvent, pointing to testimony by Detroit’s new police chief, James Craig, who detailed the inadequate conditions in police precincts.
The judge, however, chastised the city for a plan it proposed for creditors in June, calling it vague, and said the city had not negotiated in good faith. But he ruled that city officials had filed their petition in good faith, meaning the city was eligible for bankruptcy protection.
The ruling is a blow for unions, which had argued during the hearings that Michigan Gov. Rick Snyder appointed Kevyn Orr as Detroit's emergency manager explicitly so that he could file for bankruptcy, and that Orr did not negotiate in good faith with the unions. They also said that the bankruptcy filing was unconstitutional because a section of the Michigan constitution protects pensions. Dozens of pensioners and others protested outside the courthouse Tuesday.
Perhaps worse for unions, Rhodes said Tuesday that while in bankruptcy, creditors may have to take financial losses. That means Rhodes could allow the city to cut pension payments.
Unions had said they planned to appeal if Rhodes declared the city eligible for bankruptcy, though any appeal is not likely to slow the bankruptcy proceedings.
Detroit has not been contributing to its pension funds and by the end of the year, it will have deferred $100 million in contributions. Orr has not said specifically how he would alter pension payments, but he has said some adjustment would need to be made to deal with $3.5 billion of unfunded liabilities. Unions say that could mean cutting pensions in half. The market value of the assets in the pension funds on June 30, 2012, was $4.3 billion.
Unions worry that if pensions are cut back in Detroit, other cities and states across the country could soon follow suit.
“It’s a little bit offensive -- thinking, ‘I can declare bankruptcy so I can get out from paying people what I would owe them,’ ” said Steve Kreisberg, director of collective bargaining at the American Federation of State, County and Municipal Employees, or AFSCME. “It's part of their political strategy to undercut pensions.”
Many in Detroit also have objected to the idea of a state-appointed emergency manager to run the city, taking over from the mayor and City Council. Michigan voters rejected the emergency manager law in a referendum in November 2012. But the legislature later passed an altered version of the measure, allowing Snyder to appoint Orr last March.
Rhodes said Tuesday that the controversy over the emergency manager law was not a matter for the bankruptcy eligibility hearing.
The ruling capped a weeks-long hearing in which stakeholders, including pensioners, and the governor testified.
“What we’ve seen in this court is the judge was very careful to make sure that everyone had their say,” said Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco.
During one particularly moving day in court, Rhodes opened up the court to citizens who objected to the bankruptcy, and dozens of residents testified about how they had paid into pensions their whole lives and planned their retirements on the payments.
The bankruptcy was a “coldly calculated, unethical and immoral breach of public trust,” said one retiree, William Curtis Walton.
In a report to creditors in June, the city outlined its dire straits: Its population has declined 63% from its postwar peak, its general fund has run a deficit for the past five years, 40% of its street lights don’t work, and the understaffed police department has some of the slowest response times in the nation.
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