After a federal judge ruled that Detroit was eligible for bankruptcy protection and cleared the way for municipal pensions to be cut, city officials were upbeat, called for unity and urged people to look ahead with optimism.
But for the unions, whose members, current and retired, are likely to face benefit reductions, the decision signaled the next legal round.
The disparate reactions were symptomatic of what lies ahead for Detroit as it officially enters United States Bankruptcy Court. The political differences between the city and its the unions have not gone away, nor has the economic reality of trying to reduce about $18 billion in debt by deciding how to apportion the pain from the cuts.
In his decision Tuesday, U.S. Bankruptcy Judge Steven W. Rhodes found that Detroit, once the nation’s fourth-largest city, was insolvent and was allowed to enter Chapter 9 bankruptcy protection, making it the largest U.S. city to do so. He also ruled that the pension checks of retirees could be reduced during the bankruptcy proceedings.
“This once-proud and prosperous city cannot pay its debts. It is insolvent. It’s eligible for bankruptcy,” Rhodes said. “But it also has an opportunity for a fresh start.”
Under Kevyn Orr, the state-appointed emergency manager, the city will introduce its proposal to restructure its debt and reshape government services and operations. It will file a plan of adjustment within weeks and a disclosure statement with more details early next year. The goal is for Detroit to exit bankruptcy protection by the end of September.
“I would ask creditors and our labor partners to come forward and work with us to get at the sorely needed reform this city has got to achieve,” Orr said during a televised news conference. “Hopefully we can present a consensual plan of adjustment.”
“This eligibility ruling is a start for us. It is an overture, an opportunity to work together,” he said. “Let’s come together, work together and get this done.”
The conflicts among the unions and other creditors are sharp, however.
“We’re disappointed by the ruling,” Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, which represents half the city’s workers, said in a telephone interview with the Los Angeles Times. The unions maintain that the state constitution protects pensions from being cut, an issue that could end up being decided by the U.S. Supreme Court.
In his ruling, Rhodes said Michigan’s protections “do not apply to the federal Bankruptcy Court,” adding that pensions are not entitled to “any extraordinary attention” compared with other debts. He said the court would not “lightly or casually exercise the power to impair pensions,” but he was clear that the court would allow cuts. Atty. Gen. Bill Schuette said he disagreed with that part of the decision.
“We’ve tried hard to negotiate,” Levine said, adding that Orr had not been willing to bargain in good faith. Levine said she had already sought permission to take the case directly to the 6th Circuit Court of Appeals in Cincinnati because time is of the essence and there is no stay of the bankruptcy ruling while the appeal is underway.
“Our members and retirees remain concerned about their pensions and jobs,” she said.
The Detroit firefighters union also said that it would fight to save the pensions of its retired members as well as firefighter jobs that could be lost in the reorganization.
Time is important, said Nathan Resnick, a Detroit bankruptcy lawyer, who is not involved in the case.
“The overall umbrella issue here, if we look at the way in which Judge Rhodes played his cards, is that he wants the whole case expedited,” Resnick said. “He wants to move it. He wants to move it fast. He doesn’t want it to languish, either in front of him or the appellate court.”
Resnick said Rhodes stayed focused on the big picture.
“It isn’t that he’s unsympathetic to a company going out of business,” Resnick said. “But because he’s a veteran judge and he’s heard those stories many times, he also has a key awareness that what may seem horrendous to all those folks in the moment is not really the big picture. The big picture is should the city reorganize and does it need to be reorganized and what does that mean in the future and who will benefit in the long run.
“The pensioners, the sympathy runs deep for them, no doubt,” he said. “But the fact remains -- you see in all bankruptcy cases -- where’s the money going to come from?”
“We’re trying to be very thoughtful, measured and humane,” Orr said. “The reality is that there is not enough money to address the situation no matter what we do.”
Mayor Dave Bing, who did not seek reelection and whose terms expires at the end of the year, said the ruling would be beneficial in the long run.
“There’s going to be a lot of pain for a lot of different people,“ he told reporters. “But in the long run, the future will be bright.
“Now the hard work starts,” he said.