The largest municipal bankruptcy in U.S. history took a major step forward Tuesday when a federal judge ruled that the city of Detroit is eligible for protection under Chapter 9 of the U.S. bankruptcy code.
The embattled city is trying to work its way out from under $18.5 billion in debt. In issuing his decision, Judge Steven Rhodes said "the court finds that Detroit was and is insolvent." Rhodes also said the city can seek to cut pensions for its retirees as it works to reduce its debt. He also cautioned, though, that such cuts must be fair and equitable — a signal he won't rubber-stamp the city's decisions.
Unions and pension funds had argued in court that the city did not bargain with them in good faith before filing for Chapter 9 protection. On that point, Rhodes had critical words for the city's negotiators: "Charitably stated, the [city's] proposal is very summary in nature," he said of Detroit's offer to unions and creditors. He also "scolded" the city for hurrying the negotiations, the Detroit Free Press reports.
But Rhodes concluded it would have been "impracticable" for the city to negotiate in good faith. "In other words," writes Detroit's WXYZ-TV, the city's financial situation was "so dire that negotiating in good faith would not have been realistic."
The city's bankruptcy case, Rhodes said, should not be dismissed over the "good faith" bargaining issue. "This case was filed in good faith and should not be dismissed," he ruled.
We've posted previously about what happens after a municipality gets bankruptcy protection. It's expected to be years before Detroit settles with all its creditors and finds ways to further reduce its labor costs and cut pension benefits. Federal bankruptcy courts will still be overseeing the process. Next up for the city, according to the Free Press:
"Emergency manager Kevyn Orr would proceed with plans to propose a massive restructuring plan, called a 'plan of adjustment,' by the end of the month. The plan would include offers to bondholders, retirees and unions and likely would also include the proposed sale of assets, such as [Detroit Institute of Arts] property and the city's water and sewer department. Several creditors have already signaled they plan to appeal."