Judge rules Detroit is eligible for bankruptcy, city can protect itself under Chapter 9

Dec 3, 2013

U.S. Bankruptcy Judge Steven Rhodes ruled this morning that the city of Detroit is allowed to protect itself from its creditors under Chapter 9 municipal bankruptcy protection. In his ruling, Rhodes said pensions can be treated like any other debt and are subject to potential cuts. We've been following the news as it unfolds today.

Update 3:31 p.m.

Michigan Attorney General Bill Schuette issued a statement today saying he supported the bankruptcy ruling, but was "deeply disappointed" with Rhodes' ruling that pensions are eligible for cuts.

From his statement:

I will continue to aggressively defend pensions and Article 9, Section 24 of the Michigan Constitution as this case proceeds to the confirmation stage of the bankruptcy process, at which time we can thoroughly review any plans for potential legal action involving pensions.

In the meantime, I plan to file amicus briefs in support of pension protections provided under the Michigan Constitution.”

Michigan's Constitution states:

The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities.

Rhodes ruled today that in the case of a municipal bankruptcy, such contracts can be subject to change.

1:14 p.m.

The Detroit Institute of Arts responded to the Judge Rhodes’ ruling.

From the press release:

“...The DIA art collection is a cultural resource of the people of Detroit, the tri-county area and the entire State of Michigan. The museum's collection is the result of more than a century of public and private charitable contributions for the benefit of the public. Protected by a charitable and public trust, the collection has survived several municipal fiscal crises and financial downturns, including the Great Depression, free from threats to its existence.
 

…The DIA therefore opposes the motion filed last week by certain City creditors to allow them to form a committee to oversee the valuation and sale or "monetization" of the museum art collection to satisfy municipal obligations.”

The motion in question arose last week, when bondholders, European banks, and AFSCME, the city’s largest employee union, asked Judge Rhodes to create an independent committee to evaluate the value of the museum’s works.

Today, Orr said everything is still on the table when it comes to working out Detroit’s debt — meaning the DIA might not be exempt from his attempt to pay back money the city owes. Orr said a “solution” to the DIA question will be included in his financial reorganization plan.

Update 12:07 p.m.

Here are the statements from state and city leaders on today's ruling.

The current leader of Detroit, Emergency Manager Kevyn Orr, issued the following statement regarding today's ruling:

“We are pleased with Judge Rhodes’ decision today, and we will continue to press ahead with the ongoing revitalization of Detroit.  We look forward to working with all our creditors – pension funds, unions and lenders – to achieve a consensual agreement on a restructuring plan that balances their financial recoveries with the very real needs of the 700,000 citizens of Detroit.

“We are making good progress.  In addition to today’s important decision, Detroit has transferred its electric operations and customers to DTE Energy and begun a program to improve City lighting. It has announced plans to privatize trash collection that will save $6 million a year while improving services and adding curbside recycling. It has invested in sorely needed equipment for its police, fire and other first responders.  The City also has arranged, pending a court hearing later this month, $350 million of post-petition financing to improve its financial condition, lessen some of its debt obligations, and make much-needed investments. The City is also committed to the federal mediation already underway aimed at resolving disputes with its creditors and we fully support U.S. District Court Chief Judge Gerald Rosen’s efforts to find additive solutions, particularly from the philanthropic community, to the City’s financial issues.

“Time is of the essence and we will continue to move forward as quickly and efficiently as possible.  We plan to submit a Plan of Adjustment in the coming weeks, file a Disclosure Statement early next year and work to exit Chapter 9 protection by the end of September.  We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens.”

And the man who appointed Kevyn Orr, Michigan Governor Rick Snyder, issued this statement:

“Today, the federal court allowed Detroit to stay on the path toward a brighter future.  A future where streetlights work and ambulances respond quickly. A future where crime and blight shrink, and where jobs and investments surge.

“Authorizing the emergency manager to seek federal bankruptcy protection was a difficult decision, but it was the last viable option to restore the city and provide Detroit’s 700,000 residents with the public services they need and deserve.

“Judge Rhodes’ ruling today affirms that decision.

“We need to recognize that this decision is a call to action. We are confronting fiscal realities that have been ignored for too long. Today’s decision will allow Detroit to regain its financial footing and spark investments in key areas that will improve the quality of life for all residents and encourage growth and investment.

“We know that Detroit’s comeback is already in motion. We’ve seen the revitalization in downtown and midtown. Now, with our partners in the city and beyond, we will correct the municipal problems that were decades in the making and ensure strong, thriving neighborhoods.

“There will be other difficult decisions as we work through this process. But Michigan and Detroit are resilient and are the comeback stories in the country. Working together we can and will make sure that reinvention happens.”

11:55 a.m.

The mayor-elect of Detroit, Mike Duggan, released this statement after Judge Rhodes' decision:

"This is a day in Detroit's history that none of us wanted to see.  Now that Judge Rhodes has ruled the city eligible for bankruptcy, we are about to move into the Plan of Adjustment phase that is likely to define our city government for years to come.

"I'm going to do everything I can to advocate on behalf of Detroit's future in this process.  We need to make sure the retirees are treated fairly on the pensions they earned and we need to make certain we come out of bankruptcy in a way we can afford to provide the quality of city services the people of Detroit deserve."

And Democratic gubernatorial candidate Mark Schauer sent this statement:

“It’s time to rebuild the great city of Detroit. How we got here isn’t as important as how we build a better future for Detroit’s families, businesses, and neighborhoods. As the bankruptcy restructuring plan advances, Gov. Snyder and Kevyn Orr have a responsibility to uphold Michigan’s constitution by protecting hard-earned retiree pensions over Wall Street creditors. Moreover, I would strongly urge Gov. Snyder to empower Mayor-Elect Duggan to lead the city’s day-to-day turnaround efforts. It’s time for Detroiters to lead Detroit.”

11:29 a.m.

U.S. Bankruptcy Judge Steven Rhodes made it official this morning.

He ruled that Detroit is allowed to protect itself from creditors, including the city's pensioners, under Chapter 9 municipal bankruptcy protection.

With his ruling, Detroit breaks two records:

  1. It becomes the largest city to go bankrupt.
  2. It's the largest amount of debt in Chapter 9 bankruptcy history. 

So the next steps are tackling the estimated $18 billion in debt.

There's been a lot of speculation over how Detroit's creditors could recoup some of their losses.

  • Will there be money from a sale of DIA art?
  • Will Detroiters' pensions and heath care costs be slashed?
  • What city services will be privatized?
  • How will Detroit's Water and Sewerage Department be run?

All these questions now, will be answered through a process set up by a municipal bankruptcy court.

The next deadline for the city's emergency manager, Kevyn Orr, is March 1, 2014. That's when the city has to submit its reorganization plan to bankruptcy court. Orr has said in the past that he'll submit that plan by the end of the year.

We'll have more on today's ruling from Michigan Radio's Sarah Cwiek. Also, listen for interviews today on Here & Now and Stateside.