Judge Steven Rhodes gave the go ahead for the historic Detroit Bankruptcy to move forward, rejecting arguments from unions, pension funds and retirees, whom of which stand to lose big under any plan to address Detroit’s long-term unsustainable and crippling debt.
The decision Tuesday was highly anticipated, and ruled that the financially distraught city is legally able and eligible to shed billions in incurred debt, and clears the way for the city to proceed in the largest public bankruptcy in U.S. history.
“This once proud and prosperous city can’t pay its debts. It’s insolvent. It’s eligible for bankruptcy,” Rhodes said in announcing his decision. “At the same time, it also has an opportunity for a fresh start.”
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Though the plan isn’t yet in front of Judge Rhodes, who presided over the 9-day trial, the issue was whether or not Detroit met specific conditions under federal law making it eligible to stay in bankruptcy court and capable of turning around its finances after years of liberal big government mismanagement, chronic population loss due to liberal tax policy, and an utter yet inevitable collapse of the city’s middle class.
The city argued that it requires bankruptcy protection for the good of their downtrodden residents suffering from poor yet basic city services, such as slow to literally nonexistent police response times, darkened or nonexistent streetlights and erratic if any garbage pickup. The garbage pickup failures were a concern mentioned by Judge Rhodes throughout the trial.
Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city.
“The status quo is unacceptable,” emergency manager Kevyn Orr testified.
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Rhodes said Tuesday that there is no doubt Detroit has a proud history, but no longer has the resources to provide critical services, the judge said, adding: “The city needs help.”
Rhodes’ decision is a victory for Gov. Snyder and the entire population who remains in the failed city. He said pensions, as with any contract, naturally can be cut. Judge Rhodes noted that a provision in the Michigan Constitution protecting public pensions shouldn’t be used, and in fact is not, a bulletproof shield in a bankruptcy largely driven by those pensions.
The city says pension funds are short by $3.5 billion. Frightened retirees making less than $20,000 a year appeared in court and put a face on the Detroit bankruptcy case. Despite the language in his ruling, Rhodes cautioned everyone that he won’t automatically approve pension cuts that could be part of Detroit’s eventual plan to get out of bankruptcy.
Fine artwork, which is potentially worth billions at the Detroit Institute of Arts, could be part of a solution for creditors, as well as the sale of a water department that serves much of the area encompassing southeastern Michigan. Orr, unsurprisingly, offered just pennies on every dollar owed during meetings with creditors before bankruptcy.
Behind closed doors, mediators, led by another judge, have been meeting with Orr’s team and creditors for weeks to explore possible settlements.
A large portion of the trial, which ended last month on November 8, centered around on whether or not Orr had “good-faith” negotiations with creditors before the Detroit bankruptcy filing, a pivotal and necessary step for a local government to be eligible for Chapter 9. Orr argued that the four weeks spent on negotiations were adequate, while unions and pension funds said it wasn’t a serious effort.
“The governor took more time to interview the consultants to help the city with restructuring than they took to negotiate the restructuring itself. That’s absurd,” attorney Sharon Levine, representing AFSCME, said at trial.
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An appeal of Rhodes’ decision is a certainty. Opponents want to go directly to a federal appeals court in Cincinnati, bypassing the usual procedure of having a U.S. District Court judge hear the case.
Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. But by July, Orr and Gov. Rick Snyder decided bankruptcy was Detroit’s best option.
Detroit, a manufacturing hub that offered good-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million since then. Tax revenue in a city that is larger in square miles than Manhattan, Boston and San Francisco combined can’t reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat.
Donors have written checks for new police cars and ambulances. A new agency has been created to revive tens of thousands of streetlights that are dim or simply broken after years of vandalism and mismanagement.
While downtown and Midtown are experiencing a rebirth, even apartments with few vacancies, many traditional neighborhoods are scarred with blight and burned-out bungalows.