|
 The ruling by U.S. Judge Steven Rhodes, who cited the city's
dismal finances and $18 billion owed to a multitude of creditors in
support of his decision, marks a watershed in the history of
Detroit. Once known as the cradle of the U.S. auto industry, the
arsenal of democracy and the birthplace of Motown music, Detroit now
adds an ignominious new title: largest bankrupt city in U.S.
history.
Detroit's emergency manager, Kevyn Orr, in a news conference after
the court hearing, said the city will seek to file a plan of
readjustment — the city's roadmap toward financial solvency — by
early January. He said negotiations are continuing with unions "even
now," and called on all parties to bridge gaps in order to conclude
Detroit's bankruptcy and move back toward fiscal stability.
In a financial plan he had laid out prior to the bankruptcy filing,
Orr had proposed offering unsecured creditors shares in a $2 billion
note in exchange for $11 billion in unsecured debt. Orr declined to
state on Tuesday whether that remains his plan, and also refused to
say how much of a reduction he will seek from secured creditors.
Rhodes, in his ruling that Detroit is eligible, accepted the city's
contention that it is broke and that negotiations with its thousands
of creditors were infeasible. That was enough to declare Detroit
bankrupt under Chapter 9 of the federal bankruptcy code, Rhodes
ruled. In a symbolic setback for the city, however, Rhodes found
that Orr did not negotiate in good faith with creditors prior to the
city's July 18 bankruptcy filing.
"It is indeed a momentous day," Rhodes said as he read aloud for
more than an hour from a written statement in a packed courtroom.
"We have here a judicial finding that this once-proud and prosperous
city cannot pay its debts. It's insolvent. It's eligible for
bankruptcy. At the same time it has an opportunity for a fresh
start."
Rhodes also said the city could cut pensions as part of the
restructuring, ruling against an argument that Michigan's
constitution protects them from being slashed. However, Rhodes
warned he will not rubber-stamp any pension cuts.
His ruling encompassed fine points of law as well as broad
observations about Detroit's fiscal health. He stated that his
findings were informed by a breakdown in Detroit's public
infrastructure and rising crime rate. Rhodes will also issue a
written opinion on Wednesday, which he said is around 140 pages.
STRUGGLING CITY
Detroit is burdened by $18.5 billion in debt as it struggles to
provide even the most basic services to 700,000 residents. About 40
percent of the city's streetlights do not work and about 78,000
abandoned buildings litter the city, whose population peaked at 1.8
million in 1950.
"The city no longer has the resources to provide its residents with
basic police, fire and EMS services," Rhodes said. He noted the
average police response time is 58 minutes, more than five times the
national average of 11 minutes.
"Without the protection of Chapter 9 the city will be forced to
continue on the path it was on before this case," Rhodes said later
in his ruling.
The judge declined to stay the bankruptcy proceedings as potential
appeals proceed through the courts. He also turned down an effort to
allow any appeals of his ruling to go directly to the 6th Circuit
U.S. Court of Appeals. Rhodes declared that motions to appeal the
case must first be filed in bankruptcy court. He previously stayed
all state court action in the case.
The American Federation of State, County and Municipal Employees
Council 25 filed a notice of appeal of Rhodes' ruling in the
bankruptcy court. The appeal, expected to be joined by the city's
largest pension funds, claims the judge erred in ruling that federal
bankruptcy law trumps public employee pension protections embedded
in the Michigan Constitution.
Lynn Brimer, attorney for the Retired Detroit Police Members
Association, said it appeared that Rhodes "made it clear that they
(pensioners) should not be treated as a general unsecured creditor."
She also said that the city's retirees should not be treated the
same as bondholders who performed due diligence and knew the risks
of investing in Detroit while city workers were promised years ago
that they would be relatively secure in retirement.
Sharon Levine, attorney for the AFSCME union, said that any cuts to
pensions for the city's retirees would be harmful, because the
average city retiree receives $19,000 in annual pension benefits.
"When we were coming out of the courthouse it was snowing, and
people were asking us, ‘Am I going to lose my house?'
NEW CHAPTER
Tuesday's ruling begins a new chapter in the case that first arrived
in federal court with Detroit's July 18 bankruptcy petition. As
emergency manager Orr works toward submitting a plan to readjust
Detroit's more than $18 billion in debt — to be accomplished chiefly
by forcing creditors to take a discount on what the city owes them — an appeals process will begin in the federal courts.
In order to meet federal eligibility requirements, Detroit had to
prove that it is insolvent, it was authorized to file for bankruptcy
and that it negotiated with creditors in good faith or that
negotiations were impractical.
Orr, a former bankruptcy lawyer, was appointed in March by Michigan
Governor Rick Snyder, a Republican.
[to top of second column] |
In his lead-up to the ruling, Rhodes offered a detailed analysis of
key arguments made by the city's labor unions, retirees and pension
funds opposed to the bankruptcy. He found that Chapter 9 of the
federal bankruptcy code is constitutional and while Michigan's
constitution protects public pension benefits as contracts, those
contracts can be impaired in a municipal bankruptcy.
Michigan Attorney General Bill Schuette, who has
argued that pension rights are protected by the state constitution,
said in a statement that he was "deeply disappointed" by Rhodes'
ruling that pensions could be diminished.
Schuette said he will file amicus briefs with the court reaffirming
his support for protecting pensions.
Rhodes also found that the 2012 Michigan law that allowed the city
to file for bankruptcy with the governor's authorization was
constitutional. Before Orr filed for bankruptcy, he obtained
approval from Governor Snyder.
Despite ruling that the city met the test for bankruptcy, Rhodes
found fault with how Orr proceeded toward the bankruptcy filing.
The city should have more "openly and forthrightly" discussed
bankruptcy as a possibility to rectify Detroit's problems in the
months and years leading up to the filing. A series of meetings and
presentations the city held with creditors leading up to the filing
did not meet the good-faith requirement, he said.
The city's financial troubles were so bad that Detroit's filing was
inevitable, Rhodes said.
"The court must conclude that the bankruptcy filing by the city of
Detroit was a foregone conclusion during 2013, but waiting too long
does not constitute bad faith," Rhodes said.
The city acted in good faith when it ultimately filed its bankruptcy
petition, largely because it was unfeasible for the city to
negotiate with its thousands of creditors.
Analysts, however, do not expect a rush of copycat bankruptcy
filings by distressed municipalities given the arduous process of
proving eligibility, although the ruling does provide something of a
template that others may attempt to follow in time.
"It could create more bankruptcies because it's a way to get out of
pension contracts," said Richard Ciccarone, president of Merritt
Research Services. "It more than likely will mean that hard-pressed,
stressed credits with legacy liabilities will have to consider the
option."
UNION CONCERNS
With Rhodes' ruling in hand, attention now turns to Detroit's
negotiations with creditors, retirees, unions and pension funds.
Detroit says about half its liabilities stem from retiree benefits,
with $5.7 billion in liabilities relating to retiree healthcare and
another $3.5 billion from pensions.
Likely cuts to retiree pensions and changes in healthcare benefits
are at the heart of union concerns about Detroit's bankruptcy. And a
separate issue, the future of the collection of the Detroit
Institute of Arts, a prized city asset, has drawn attention inside
Detroit and around the world. The museum includes paintings by
Vincent van Gogh and Henri Matisse, an original cast of Auguste
Rodin's "The Thinker," and a fresco mural by Mexican artist Diego
Rivera.
Orr, in remarks after Rhodes' ruling on Tuesday, said only about 500
pieces of the museum's collection might be affected by Detroit's
bankruptcy. He declined to offer any details but said an
announcement will be made soon.
He also emphasized the need for the city to move on. "While we are
very pleased, we remain very concerned to adjust the city's debt and
improve the level of service for its citizens and to also prepare
for the city to exit this receivership in a fashion that restores
democracy to the city."
Some critics of Orr have claimed his position is undemocratic
because it leaves elected officials like Mayor Dave Bing and the
city council without power to set policy or make binding decisions.
Harold Schaitberger, general president of the International
Association of Fire Fighters based in Washington, said, "Going
forward, this is as much about politics and the priorities of public
officials as it is about bankruptcy and the court."
Schaitberger said that elected officials in the United States are
expected to continue to "push for austerity no matter the cost to
the lives of workers and public safety."
Rhodes in announcing his ruling said asset sales or other one-time
infusions of cash will not solve Detroit's long-term financial
troubles.
"A one-time infusion of cash, whether from an asset sale or
borrowing, delays the inevitable," he said.
[By Joseph Lichterman and Bernie Woodall]
(Additional reporting by Karen Pierog in Chicago, Ben Klayman in
Detroit and Lisa Lambert in Washington; editing by David Greising,
Dan Burns and Matthew Lewis)
|
