Detroit Is Officially Bankrupt, Judge Says

A U.S. bankruptcy judge has decided that the city of Detroit can enter into bankruptcy, about five months after the city filed for the largest municipal bankruptcy in history. At stake is the future of pensions for thousands of city retirees and artwork in the Detroit Institute of Art worth millions.

Back in July, state-appointed emergency manager Kevyn Orr filed for Chapter 9 bankruptcy on behalf of the city, stating that Detroit was unable to meet $18 billion in current and long-term obligations. Relieving the city of said obligations to about 100,000 creditors would potentially move Detroit away from financial turmoil, Orr has said.

The city had to meet four tests for bankruptcy — insolvency, the constitutionality of Michigan's emergency manager law, the constitutionality of the actual bankruptcy filing, and good faith negotiations — all of which Judge Steven Rhodes' approved. (He determined that the city did not negotiate in good faith because administrators had an short amount of time to decide what to do with massive amounts of debt, but it was "impracticable" to do so anyway because of the gravity of the situation.)

With Rhodes' approval this morning, city administrators now face the task of likely slashing pensions for retirees — an issue growing in several municipalities outside Detroit, notably — to as low as 16 cents on the dollar and settling debts with creditors for as low as 10 cents on the dollar.

In his ruling, Rhodes noted that "pension obligations will rise with time," indicating that regardless of today's decision the city does have a responsibility to its retirees, but that pensions were not unlike other debts and aren't subject to "extraordinary" protection.

Creditors have pressured Orr for full payment and have repeatedly called for an appraisal of the artwork in the DIA for a potential sale. While local lawmakers and the DIA has taken preemptive measures to prevent a sale, it's not guaranteed that the DIA's possessions will no longer be shielded after today. Rhodes, to his credit, cautioned that a sale of DIA's assets wouldn't solve Detroit's long-term debt problems.

Several factors influenced Rhodes' ruling including telling testimony about the city's disastrous crime rate from newly installed police chief James Craig; a clear impairment of the city's ability to deliver basic services timely and efficiently; and an obvious inability for the city to consistently pay its debts.

Bomb squads were called to the scene of the courthouse prior to Rhodes' ruling as a preventative measure, but save for some protesters outside the courtroom, today's activity was largely uneventful. As for what happens to Detroit afterward — well, I'm looking outside my window now, all the lights are still on as they have been, there isn't chaos in the streets, there are no gates thrown up and I don't see any vultures. Avian ones, at least.

Orr is expected to be relieved of his emergency-manager duties by September, but no exact timeline has been given for bankruptcy proceedings.

[Photo via AP]