“Certainly the court must conclude that the bankruptcy filing was a foregone conclusion.”
After filing for protection more than four months ago, Detroit is now officially bankrupt.
According to The Huffington Post, Steven Rhodes, U.S. Bankruptcy Judge, ruled Tuesday that Detroit is eligible for Chapter 9 bankruptcy protection. This allows officials of the Motor City to negotiate in court with bondholders, pension funds, unions, and other stakeholders. Detroit’s liabilities have been estimated at approximately $18 million and many say that bankruptcy is the only way the city can settle its debts.
“The city cannot legally increase its tax revenues nor can it further reduce its expenses without further endangering health and safety,” Rhodes said.
Despite heated arguments by pension and union representatives, Rhodes also added that retiree pensions are also on the table for cuts.
Originally in July, a coalition including police and fire-fighter unions, retired city employees, and others sued to block the filing. They argued that they were not given an opportunity to find another solution to the filing and that the Michigan state constitution explicitly protects pension benefits from being cut. However, Mr. Rhodes ruled that it has long been understood that contracts are generally broken to creditors when a bankruptcy proceeding has begun and that since pension benefits are typically contracts. That means they do not hold any special protection.
BBC reports that residents of Detroit, like Erma and Gordon MacDonald, say, “If they take my pension away, then we’ll be in bad shape.”
“I worked hard for Detroit for 20 years, played by the rules, and already made significant sacrifices – taking pay cut after pay cut,” David Allen, 50, said. “In return for risking my life to serve my community, the city promised to take care of my family – but instead the city is retiring us into poverty.”
Allen is a retired Detroit firefighter who lost the use of his legs during a spinal injury sustained on the job in Detroit.
Rhodes continues to assure worried citizens that the court won’t take the pension cuts “lightly” and will exhaust all other options before making any changes. Pensioners on average receive $20,000 a year or less.
The criteria included in Chapter 9 bankruptcy are that: the city is insolvent (its unable to pay its debts and owes more than it can collect), the bankruptcy filing itself was constitutional, the city is in “service delivery insolvency” (it cannot afford to provide for the health and welfare of residents), and Detroit officials desire to adjust the municipality’s debts and effect a plan of adjustment.
Another important factor was to establish that city officials negotiated in good faith with creditors before filing for bankruptcy.
Detroit “could have and should have filed for bankruptcy long before it did, perhaps even years before,” Rhodes said. “Certainly the court must conclude that the bankruptcy filing was a foregone conclusion, at least in 2013.”
If the city, also known as 8 Mile, had been found ineligible for bankruptcy protection, it would have been sued by thousands of creditors in court for failing to pay its debts. Kevyn Orr, Detroit emergency manager, said that if Detroit didn’t meet Chapter 9 requirements, it would be an “Armageddon-like scenario.”
“It gives us a chance to move forward with a clean slate and make good decisions that will improve the quality of life for Detroit’s citizens,” current Mayor Dave Bing said about the bankruptcy.
However, the legal battles continue with the AFSCME, the city’s largest employee union, filing an appeal of Rhodes’ decision immediately after it was announced.
The city is now home to about 700,000 residents, down from the peak of 1.8 million in 1950, and has more than 150,000 abandoned buildings, including former schools, train stations, and factories.
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