U.S. Bankruptcy Judge Steven Rhodes issued a 140-page written ruling on Detroit's eligibility for Chapter Nine bankruptcy this morning, declaring that the city is eligible to declare bankruptcy.
Rhodes further ruled that federal bankruptcy law does not distinguish between pension obligations and other debts. Michigan's constitution has language protecting pension rights, but Rhodes said those "contractual rights" are no different from the rights of any other contract in the bankruptcy process.
Rhodes' ruling wasn't all bad news for Detroit's pensioners. He said that while pension cuts are allowed under the law, he would only approve deep cuts to pension benefits as part of an across-the-board plan to reduce the city's liabilities to all creditors.
Rhodes also said that while constitutional questions about both Chapter Nine bankruptcy and the emergency manager law are within the court's purview, he rejected arguments that either was unconstitutional.
Citing Detroit's $18 billion in long-term liabilities, including $3.5 billion in underfunded pension debt, and more than 100,000 creditors, Rhodes says Detroit "was and is" insolvent. However, he also concluded the city had not negotiated in good faith. Rhodes called a plan delivered to creditors by emergency manager Kevyn Orr on June 14 little more than a "vague proposal" to rewrite Detroit's debt. Nonetheless, Rhodes said good faith negotiation was "impracticable," so the bankruptcy filing was therefore made in good faith and allowed under the law.
"The city cannot legally increase its tax revenues nor can it further reduce its expenses without further endangering health and safety," he said in court.
Rhodes noted Detroit's decaying public infrastructure and several rounds of public employee concessions in his ruling, saying they are evidence the city has attempted to pays it debt even at the expense of day-to-day operations.
"If the city had not deferred these payments, it would have run out of cash by June 30, 2013," Rhodes said about the millions in pension fund contributions the city was obligated to make, but did not pay.
Rhodes provided some clues about what Detroit's eventual bankruptcy reorganization plan may look like, saying one-time revenue boosts from selling assets such as the Detroit Institute of Art's collection would not solve the city's long-term financial problems. Assets, he said, only should be sold when they are absolutely unnecessary to the city's function.
This ruling is expected to be appealed to the federal Sixth Circuit Court of Appeal. However, Rhodes says he will not stay the bankruptcy process during an appeal.
