In federal court Tuesday, U.S. Bankruptcy Judge Steven Rhodes ruled that the city of Detroit is legally eligible to enter bankruptcy — a decision that will allow the cash-strapped city to begin restructuring its $18 billion debt. The ruling also confirmed that Detroit is now officially the largest municipal bankruptcy in American history.
“It is indeed a momentous day,” Rhodes said. “We have here a judicial finding that this once-proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start. I hope that everybody associated with the city will recognize that opportunity.”
Law School Prof. John Pottow, an expert in bankruptcy law, said Chapter 9 is a special type of bankruptcy filing for government entities such as school boards, counties and cities. Similar to Chapter 11 bankruptcy granted to businesses, public entities have the opportunity to negotiate with their creditors and negotiate a plan for partial repayment of the debt.
For municipalities entering Chapter 9 bankruptcy, a federal judge must first determine the entity’s eligibility for bankruptcy, which includes authorization from the state, proof of the entity’s insolvency and a record that good-faith negotiations with creditors were carried out, Pottow said.
Though the court’s decision may end months of uncertainty regarding the city’s financial future, city leadership and creditors will face further hurdles as the city compiles a Plan for Adjustment in the next few weeks.
The plan will determine the terms for the partial repayment of the city’s $18 billion debt. The city will negotiate an agreement with its creditors — including unions and retirement associations whose members hold city pensions — to decide how much of the debt needs to be repaid. The remaining debt will be canceled after creditors and the judge approve the final plan.
Pottow said bankruptcy is generally a positive development for cities and their residents, except for the creditors who may lose out on the full repayment of the city’s debts, including pensions for city workers.
He added that the city’s bankruptcy would have effects on the metro Detroit region, including Ann Arbor.
“There’s spillover effect,” Pottow said. “If you have a blighted city, it’s not like that blight stops at the municipal border. It’s like if the house down the street is in foreclosure, my property value goes down, too.”
Pottow also noted that metro Detroit residents could lose out if an institution like the Detroit Institute of Arts were to close to assist in the repayment of the city’s debts.
In a statement delivered after the ruling, Detroit Mayor Dave Bing said there would be a host of difficult negotiations to follow the decision.
“We are now starting from square one,” Bing said. “There’s going to be pain for a lot of different people, but in the long run I think the future of the city will be bright.”
The city’s biggest creditors, such as unions and retiree associations, argued against a Detroit municipal bankruptcy, fearful pensions and other debts owed to their members by the city will not be honored.
“I do think it’s a tough day for all of us here in Detroit,” Bing said. “I believe since I came to office the crisis that we had — this was inevitable. I don’t think anyone necessarily wanted to go in this direction, but now that we’re here, it’s more important that we work together as opposed to continuing to fight each other.”
Emergency Manager Kevyn Orr applauded Rhodes’ decision and said his team looks forward to working with creditors on an agreeable restructuring plan.
Michigan Gov. Rick Snyder — who appointed Detroit’s controversial emergency manager — said authorizing the decision for the city to seek bankruptcy was a difficult decision, but was the last viable option to restore the services Detroiters need.
“Today, the federal court allowed Detroit to stay on the path toward a brighter future,” Snyder wrote. “A future where streetlights work and ambulances respond quickly. A future where crime and blight shrink, and where jobs and investments surge.”
Gubernatorial candidate Mark Schauer, the apparent Democratic nominee, has frequently voiced his opposition to the appointment of an unelected emergency manager. In a statement, Schauer encouraged Snyder to allow Mayor-elect Mike Duggan to lead the city’s restructuring efforts.
“It’s time to rebuild the great city of Detroit,” Schauer said. “How we got here isn’t as important as how we build a better future for Detroit’s families, businesses and neighborhoods.”