(CN) - Finding that Detroit is eligible to declare bankruptcy, a federal judge has reportedly set the stage for the largest ever public bankruptcy in the United States.
U.S. District Judge Steven Rhodes ruled from the bench Tuesday that the embattled, blue-collar Michigan city had met every test of insolvency, including being unable to provide a minimum level of basic services to its residents.
Detroit, once the nation's fourth largest city when it was the hub of the American auto industry, will now seek a way to pay off a portion of its debts and restore essential services to adequate levels under court supervision. Kevyn Orr, an emergency manager appointed by the state, told The New York Times that the goal is to emerge from court protection next year with a formal plan for starting over.
Detroit became the largest city ever to declare bankruptcy this past summer. Under Chapter 9 rules, the city had to prove its eligibility before paying diminished sums to its creditors.
In his ruling, Rhodes turned aside several objections from unions, pension funds and retirees. Those organizations stand to lose $18 billion in long-term liabilities, the Times reported.
One of the biggest arguments from the city's public sector unions and retirees was that Detroit filed for bankruptcy before a good-faith effort was made to negotiate with creditors. Rhodes ruled, however, that the size of Detroit's debts and problems made it impractical for negotiations with creditors before the bankruptcy filing.
Rhodes also ruled that public employee pensions are not protected in a federal Chapter 9 bankruptcy, even though the Michigan Constitution does specifically protect them. Federal law in this case trumps state law and public employee pensions are not entitled to heighten bankruptcy protection under it, Rhodes ruled.
Appeals are expected to be filed by lawyers for the unions. Sharon Levine, a lawyer for the local council of the American Federation of State, County and Municipal Employees, told the Times that she feared for the city's pensioners.
"They're going to lose their homes," Levine told the Times. "They're going to lose medical benefits. They're not going to be able to feed their families. These are very scary issues. So while we're working through the mediation process and we hope to be able to negotiate through the plan of adjustment process, we are going to pursue all our litigation options, as well. We have to."
Even though the pensions are not entitled to heightened protection, Rhodes did say that the court would be careful before approving any cuts in benefits to retirees.
Detroit's mayor-elect, Mike Duggan, echoed those thoughts to reporters.
"We need to make sure the retirees are treated fairly on the pensions they earned," Duggan said, "and we need to make certain we come out of bankruptcy in a way we can afford to provide the quality of city services the people of Detroit deserve."
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