Financial News

  • 4 December 2013, 13:56

Judge Rules Detroit Eligible For Bankruptcy

A judge has ruled that Detroit is eligible for bankruptcy protection, making it the largest case of its kind in US history.

Judge Steven Rhodes turned down objections from representatives of unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.

The issue for Mr 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.

Detroit, which once offered good-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million since then.

Tax revenue in a city that is larger in area than Manhattan, Boston and San Francisco combined cannot reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat.

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 garbage pickup - a concern mentioned by the judge during the trial.

Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city.

Kevyn Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has powers to reshape local finances without interference from elected officials.

By July, Mr Orr and Michigan Governor Rick Snyder decided bankruptcy was Detroit's best option.

Mr Rhodes' decision is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in Michigan's Constitution protecting public pensions isn't a bulletproof shield in a bankruptcy.