Judge: Detroit eligible for Chapter 9 bankruptcy

DETROIT » A judge ruled today that Detroit is eligible to shed billions of dollars of its long-running debt, including the pensions of thousands of workers and retirees, in a much-anticipated decision that shifts the city’s epic bankruptcy case into a new and delicate phase.

Judge Steven Rhodes, who wondered aloud why the bankruptcy had not happened years ago, said pensions can be cut just like any contract because the Michigan Constitution does not offer bulletproof protection for employee benefits. But he signaled a desire for a measured approach and warned city officials that they must be prepared to defend any deep reductions.

"This once proud and prosperous city can’t pay its debts. It’s insolvent," Rhodes said in announcing that Detroit was formally eligible for the largest public bankruptcy in U.S. history. "At the same time, it also has an opportunity for a fresh start."

The ruling came more than four months after Detroit filed for Chapter 9 protection.

Rhodes agreed with unions and pension funds that the city’s emergency manager, Kevyn Orr, did not negotiate in good faith in the weeks ahead of the July filing, a key condition under federal law. But he said the number of creditors — more than 100,000 — and a wide array of competing interests probably made that "impossible."

Detroit "could have and should have filed for bankruptcy long before it did. Perhaps years," the judge said.

The decision set the stage for officials to confront $18 billion in debt with a plan that might pay creditors just pennies on the dollar and is sure to include touchy negotiations over the pensions of about 23,000 retirees and 9,000 workers. Orr says pension funds are short by $3.5 billion.

Rhodes promised that he would not "lightly or casually" sign off on just any cuts.

The city has argued that it needs bankruptcy protection for the sake of beleaguered residents who have for years tolerated slow police responses, darkened streetlights and erratic garbage pickup — a concern mentioned by the judge during a nine-day trial that ended Nov. 8.

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.

Orr praised the judge’s ruling and pledged to "press ahead." He also acknowledged that pensions will be a sensitive issue because they represent a "human dimension," with some former employees getting by on less than $20,000 a year.

The judge spoke for more than an hour in a packed courtroom, reciting Detroit’s proud history as the diverse, hard-working "Motor City" devoted to auto manufacturing. But he then tallied a list of warts: double-digit unemployment, catastrophic debt deals, thousands of vacant homes, dilapidated public-safety vehicles and wave after wave of population loss.

Behind closed doors, mediators led by another judge have been meeting with Orr’s team and creditors for weeks to explore possible settlements.

The judge has told the city to come up with a plan to exit bankruptcy by March 1. But Orr says he would like to have one ready weeks earlier.

The city is so desperate for money that it may consider selling masterpieces from the Detroit Institute of Arts as well as a water department that serves much of southeastern Michigan.

"We need to recognize that this decision is a call to action," Gov. Rick Snyder, who supported the bankruptcy filing, said today. "We are confronting fiscal realities that have been ignored for too long."

Minutes after the ruling, a lawyer for a city union, said she would appeal. City officials got "absolutely everything" in Rhodes’ decision, she told reporters.

"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, which represents half of city workers.

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 Snyder decided bankruptcy was Detroit’s best option.

Detroit, a manufacturing hub that offered well-paying blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million people since then. With more square mileage than Manhattan, Boston and San Francisco combined, the city does not have enough tax revenue to 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 the downtown and Midtown neighborhoods are experiencing a rebirth, many others are scarred with blight and burned-out bungalows.

Detroit also has an unflattering reputation as a dangerous place. Police Chief James Craig, who arrived last summer, said he was almost carjacked in an unmarked car.

The bankruptcy case is unfolding at a time of historic political transition. Former hospital executive Mike Duggan takes over as mayor in January, the third mayor since Kwame Kilpatrick quit in a scandal in 2008 and the first white mayor in largely black Detroit since the 1970s.

Orr, the emergency manager, is in charge at least through next fall, although he’s expected to give Duggan more of a role at city hall than the current mayor, Dave Bing, who has little influence in daily operations.