U.S. Bankruptcy Judge Steven Rhodes ruled Tuesday that Detroit is eligible for Chapter 9 bankruptcy protection, allowing city officials to negotiate in court with bondholders, pension funds, unions and other stakeholders. Many say that bankruptcy is the only way the city can attempt to settle its debts, which have been estimated as high as $18 billion.
"The city cannot legally increase its tax revenues nor can it further reduce its expenses without further endangering health and safety," Rhodes said as he announced the ruling. Rhodes added that retiree pensions are also on the table for cuts, despite passionate arguments delivered by pension and union representatives in court.
In his ruling, Rhodes said the city had met most of the strict criteria detailed under the federal Chapter 9 bankruptcy law: the city is insolvent (unable to pay its debts and owing more than it can collect); the bankruptcy filing itself was constitutional; the city is in "service delivery insolvency" (meaning that 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.
But one crucial component was establishing that city officials negotiated in good faith with its creditors before filing for bankruptcy. Rhodes said that the city did not negotiate in good faith on June 14, when it met with union leaders and other stakeholders, one month before filing for bankruptcy. The filing, and particularly Detroit's attempt to negotiate with creditors, has been hotly contested by unions and other debtors in court since the trial began in October.
Rhodes scolded city officials for offering only a vague plan that would give pensioners and other stakeholders pennies on the dollar for their debt and waiting only a month to hear counterproposals. Yet Rhodes ruled -- remarking that union and pension officials admitted at trial that pension cuts would not have been binding for its members -- that the sheer number of creditors and complexity rendered negotiations "impractical, impossible really."
Bankruptcy protection limits the legal actions the city's 100,000 creditors can take to collect money owed to them. Detroit Emergency Manager Kevyn Orr and other key city leaders will move to submit a plan to pay off whatever debts it can and move forward from bankruptcy. The plan of adjustment will undoubtedly call for concessions from all of Detroit's creditors, provide a list of assets that can be sold to raise funds, and lay out a plan for reinvesting in essential city services.
Despite the state of Michigan's constitutional guarantee of public pensions, Rhodes said Detroit pensioners cannot legally be treated differently than other creditors. Pension cuts for retirees and city employees could be part of the final plan of adjustment. Pensioners on average receive $20,000 a year or less. But the disputed amount of pension debt that the city actually owes will be decided in the future, Rhodes said.
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," he added, "at least in 2013."
“Time is of the essence and we will continue to move forward as quickly and efficiently as possible," Kevyn Orr said in a statement sent to The Huffington Post. "We plan to submit a Plan of Adjustment in the coming weeks, file a Disclosure Statement early next year and work to exit Chapter 9 protection by the end of September. We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens.”
Original Article
Source: huffingtonpost.com
Author: Ashley Woods
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