Detroit bankruptcy: City 'needs help,' can file for protection, judge rules

Detroit, the largest US city to file for federal bankruptcy, 'no longer has the resources to provide its residents with basic services,' the judge ruled, saying it could seek to trim public pensions.

Joshua Lott/Reuters
A man walks past graffiti in Detroit, on Tuesday. The city is eligible for the biggest municipal bankruptcy in US history because the city is broke and negotiations with its thousands of creditors were unfeasible, a federal judge said on Tuesday.

After a protracted legal battle, a federal judge is allowing Detroit to move forward with its application for Chapter 9 bankruptcy protections, and, in a blow to public sector unions, is allowing the city to seek a reduction in pensions.

“The city needs help,” US Bankruptcy Judge Stephen Rhodes said Tuesday. “The city no longer has the resources to provide its residents with basic services.… The city cannot legally increase its tax revenues, nor can it further reduce its expenses without further endangering health and safety.”

The ruling makes Detroit the largest municipality in the US to file for a federal bankruptcy.

Judge Rhodes noted the unprecedented factors that played in this case – the historic population loss over decades, the mismanagement of city funds, and its controversial public pension burden – that the state emergency management team says are collectively contributing to its $18.5 billion in long-term liabilities. In 2012, 39 percent of the city’s revenue was used to service legacy liabilities, he noted.

Michigan Gov. Rick Snyder (R) characterized the Rhodes decision as “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,” Governor Snyder said.

To seek federal protections for relief, the city needed to prove that it was insolvent and that it filed in good faith with its nearly 100,000 creditors, which include most of its public sector labor unions. The unions testified in the nine-day trial that the state team, led by emergency financial manager Kevyn Orr, was trying to use the federal bankruptcy court to destroy the public pension protections guaranteed by Michigan’s constitution.

Rhodes agreed that the city did not negotiate in good faith. He said Orr’s June 14 proposal to creditors only allowed 30 days for a counter-offer, and was “very summary in nature.”

“The creditors cannot be faulted for failing to offer counter proposals when they did not have enough information to evaluate the city's initial vague proposal,” he said.

That behavior will not stop the bankruptcy from moving forward, Rhodes said, because the pre-filing negotiations were burdened by “the totality of the circumstances,” which made them “impracticable.”

Randye Soref, a bankruptcy attorney at the Los Angeles business and litigation law firm Polsinelli, says Rhodes determined that negotiating in good faith was not possible in this case because of the 500 lawsuits aimed at the city, among other issues.

“Detroit has been paying legacy debt for years, and as a consequence of that, if you simplify it if you are always paying it, you’re never going to catch up and that’s the reality of it,” Ms. Soref says. “Faced with what they were faced with, did they [negotiate] the right way? They did it in a way that Rhodes could find some component of good faith.”

Rhodes also said Orr was allowed to seek relief through pension cuts, saying that a ruling was needed “to expedite the resolution” of the bankruptcy. His decision is a major blow to the unions, who argued that public pensions should be considered separate from other debts because they are protected under the state constitution. Rhodes disagreed, saying that there is no violation.

He warned that just because Orr now has the right to cut pensions, he will not approve a plan with steep cuts.

While appeals are assured, they are not likely to impact the bankruptcy from moving forward. “The ruling is appealable. Will it stop anything? No. This case will continue,” Soref says.

Orr now must submit a massive restructuring plan for the city by the end of December. This will likely include a sale of assets, including billions of dollars worth of art at the Detroit Institute of Arts, proposed privatization of the city’s water and sewer departments, and renegotiated offers to creditors, retirees and labor unions.

Soref estimates approval of the plan will come in the spring. 

Labor organizations expressed outrage by the decision. In a statement, Jordan Marks, executive director of the National Public Pension Coalition in Washington, said, “the modest pensions” of city workers “could be all but wiped out.”

“This is a dark day for people of Detroit who worked hard, played by the rules, and are now at risk of losing everything,” he said.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to

QR Code to Detroit bankruptcy: City 'needs help,' can file for protection, judge rules
Read this article in
QR Code to Subscription page
Start your subscription today