Detroit is eligible to shed billions in debt in the largest public bankruptcy in US history, a judge said in a long-awaited decision that shifts the case toward how the city will accomplish that task.
Judge Steven Rhodes turned down objections from unions, pension funds, and retirees, which, like other creditors, could lose under any plan to solve $18bn (€13.2bn) in long- term liabilities. But that plan isn’t on the judge’s desk yet.
The issue for Rhodes was whether Detroit met specific conditions under federal law to stay in bankruptcy court and turn its finances around after years of mismanagement, chronic population loss, and collapse of the middle class.
The city has argued that it needs bankruptcy protection for the sake of beleaguered residents suffering from poor services such as slow to nonexistent police response, darkened streetlights, and erratic rubbish pickup.
“This once proud and prosperous city can’t pay its debts. It’s insolvent. It’s eligible for bankruptcy,” Rhodes said in announcing his decision.
“At the same time, it also has an opportunity for a fresh start.”
Before the July filing, nearly 40c of every dollar collected by Detroit was used to pay debt. That could rise to 65c without relief through bankruptcy, the city claims. Emergency manager Kevyn Orr praised the judge’s ruling in a statement and pledged to “press ahead with the ongoing revitalisation of Detroit”.
Rhodes said. “The city of Detroit was once a hard- working, diverse, vital city, the home of the automobile industry, proud of its nickname the Motor City.”
But Rhodes then recited a laundry list of Detroit’s warts: double-digit unemployment, “catastrophic” debt deals, thousands of vacant homes, dilapidated public safety vehicles, and waves of population loss. “The city needs help,” he said.
The decision is a critical milestone. He said pensions, like any contract, can be cut, adding a provision in the Michigan Constitution protecting public pensions isn’t a bulletproof shield in a bankruptcy.
The city says pension funds are short by $3.5bn. Despite his finding, Rhodes cautioned that he won’t automatically approve pension cuts that could be part of Detroit’s eventual plan to get out of bankruptcy.
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