In historic ruling, federal judge sets Detroit on path to exit bankruptcy

A federal judge ruled Friday that a plan to end Detroit's Chapter 9 bankruptcy was fair, setting the stage for the city to shed billions in debt and begin to fix basic city services.

Rebecca Cook/Reuters
City of Detroit worker retirees William Davis (l.) and Walter Knall sit in the over-flow room of the Theodore J. Levin US Courthouse as they listen to the ruling on the Detroit municipal bankruptcy in Detroit, Mich., Friday. A US Court judge on Friday confirmed Detroit's plan to adjust $18 billion of debt and exit the biggest-ever municipal bankruptcy.

In a landmark ruling, a federal judge on Friday approved a plan designed to end Detroit's $18 billion historic bankruptcy, the nation's largest-ever municipal bankruptcy filing. 

The ruling by Judge Steven Rhodes, who is overseeing the historic case, came more than two months after the start of a hearing to determine whether the plan was fair to creditors and feasible for the city to implement. 

Judge Rhodes' ruling provides the legal authority for the city to rid itself of more than $7 billion in debt and to reinvest up to $1.7 billion in city services over a period of 10 years.

The city received national and international attention after filing for bankruptcy on July 18, 2013, under the management of emergency manager Kevyn Orr, who was appointed by Republican Gov. Rick Snyder. At the time, the city had roughly $18 billion in debt and was struggling with annual budget deficits, faulty city services, and urban blight that cast the Motor City as a symbol of decay in the minds of many around the world. Now, it is expected to emerge from bankruptcy proceedings in mere weeks. 

As multiple experts and media outlets have noted, Friday's ruling came faster than many had predicted. For example, smaller cities to declare bankruptcy – such as Vallejo, Calif., and Stockton, Calif. – took years before emerging from litigation, The New York Times reports. 

In his ruling, Rhodes noted the urgency of ensuring Detroit's future. 

"This city is insolvent and desperately needs to fix its future," he said, according to the Detroit Free Press. 

Detroit's exit plan comes after months of private mediation, much of which involved negotiations with key groups to be affected, including financial creditors and and retired city workers, the Times notes. 

Dubbed the "grand bargain" by the Free Press, a deal was struck to reduce cuts to pensions and preserve the Detroit Institute of Arts. Though unions and retirees had argued their pensions were protected by the Michigan state constitution, Rhodes held in a ruling late last year that pension benefits were not protected by the US Constitution, regardless of whether they were protected in the state constitution.

"The General Retirement System's Board of Trustees are relieved that this turbulent period in Detroit's history and in our pensioners lives has come to conclusion," said Tina Bassett, spokesperson for the General Retirement System of the city of Detroit. "Our retirees made the most difficult decision to support this plan. It was done with personal sacrifice accompanied by great disappointment in a legal system in which they believed their pensions were protected by the Michigan Constitution."

In addition to letting the city accept $816 million over a 20-year period from the state of Michigan, nonprofit foundations, and DIA donors to keep pension cuts down and preserve the DIA, the museum will not have to sell any pieces of art to pay off debts, which was long a worry of many Detroiters.  

Rhodes acknowledged the 4.5 percent pension cut could cause "severe" hardship for many retirees who average less than $20,000 a year. But he said the solution "borders on miraculous," especially when the city at one time was proposing reductions of more than 20 percent.

With more square miles than Manhattan, Boston, and San Francisco combined, the city once housed more than a million people. Since 1980, however, the population declined from 1.2 million to just 688,000 as Detroiters abandoned homes and neighborhoods in the wake of the near collapse of the city's auto industry.

Followed closely by other financially beleaguered cities and counties around the country, Friday's ruling stood as a glimmer of hope for the city.

"Judge Rhodes' decision is historic and a validation for everyone who has been committed to Detroit," said Mary Barra, chief executive officer of General Motors, headquartered in Detroit. "Working together, we can transform the city and you can see clear progress in the restoration of downtown, the entrepreneurs who are flocking here, the massive building projects getting underway and the work being done to improve education, neighborhoods and city services."

However, it will still take at least a decade before the city is self-sufficient once more. A Financial Review Commission approved by the governor and state legislature will watch over the city's finances. And an investment committee will monitor decisions made by the two pension boards in the city, according to USA Today. 

Material from The Associated Press and Reuters was used in this report. 

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