DETROIT (AP) — Detroit is eligible to shed billions in debt in the largest public bankruptcy in U.S. history, a judge said Tuesday in a long-awaited decision that now shifts the case toward how the city 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.
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.
“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.”
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.
Emergency manager Kevyn Orr, who had testified the city’s current conditions are “unacceptable,” release a statement praising the judge’s ruling and pledging to “press ahead with the ongoing revitalization of Detroit.”
Rhodes said Tuesday that Detroit has a proud history.
“The city of Detroit was once a hard-working, diverse, vital city, the home of the automobile industry, proud of its nickname the Motor City,” he said. But he then recited a laundry list of Detroit’s warts: double-digit unemployment, “catastrophic” debt deals, thousands of vacant homes, dilapidated public safety vehicles and waves of population loss.
Detroit no longer has the resources to provide critical services, the judge said, adding: “The city needs help.”
Rhodes’ decision is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in the Michigan 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.