Detroit is eligible to shed billions in debt in the largest public bankruptcy in US history, a judge said in a decision that now shifts the case toward how the once-thriving manufacturing hub will accomplish that task.
Judge Steven Rhodes turned down objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.
But that plan isn't on the judge's desk yet. The issue for Rhodes, who presided over a nine-day trial, was whether Detroit met specific conditions under federal law to stay in bankruptcy court and turn its finances around after years of mismanagement, chronic population loss and collapse of the middle class.
Detroit, which once 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 area 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.
The city has argued that it needs bankruptcy protection for the sake of beleaguered residents suffering from poor services such as slow to nonexistent police response, darkened streetlights and erratic garbage pickup a concern mentioned by the judge during 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.
Kevyn 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 Michigan Gov. Rick Snyder decided bankruptcy was Detroit's best option.
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Rhodes' decision is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in Michigan's Constitution protecting public pensions isn't a bulletproof shield in a bankruptcy.
The city says pension funds are short by $3.5 billion. Anxious retirees drawing less than $20,000 a year have appeared in court and put an anguished face on the case. Despite his finding, 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.
There are other wrinkles. Art possibly 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 southeastern Michigan. Orr 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.
Much of the trial, which ended November 8, focused on whether Orr's team had "good-faith" negotiations with creditors before the filing, a key step for a local government to be eligible for Chapter 9. Orr said four weeks were plenty, but unions and pension funds said there never were serious across-the-table talks.
An appeal of Rhodes' decision is a certainty.
Besides financial challenges, Detroit has an unflattering reputation as a dangerous place. In early November, five people were killed in two unrelated shootings just a few days apart. Police Chief James Craig, who arrived last summer, said he was almost carjacked in an unmarked car.