Landmark Case Allows Detroit To Exit Bankruptcy

In one of the largest municipal bankruptcy cases, a federal judge approved Detroit’s debt-cutting plan.
Fifteen months after Detroit had filed for Chapter 9 bankruptcy protection, Judge Steven Rhodes finally ruled that the city’s plan was feasible and fair and equitable to creditors as per the requirements of bankruptcy law.

Detroit has been forced into insolvency and “probate proceedings” due to rising debt, high pension and healthcare costs, significant population loss, corruption, mismanagement, dwindling tax base and financial problems. This latest ruling is a rare milestone for cash-strapped cities. More than one-third of Detroit’s long-term debt will be trimmed from its balance sheet.

According to Detroit’s Emergency Manager Kevyn Orr, “I’m probably more surprised about how well things have turned out compared to where we started. The city had been through a long period of trauma.”

The ruling does not translate into complete independence for Detroit. The city will have a financial-oversight board monitoring its finances and its pension-fund investments for the next dozen years or so.

Judge Rhodes believes this is the ideal model for rebuilding a broken city. He also thought this would be a fair decision for the residents of Detroit who have had to endure an inhumane and intolerable level of city services. Approximately $1.7 billion will also be spent on new police cars, fire trucks and improved city services.

Under the rebuilding plan, retiree pensions will be cut down by 4.5 percent under, up to $230 million will be recouped from retirees and some members of Detroit’s General Retirement System may face additional reductions in their pension checks.

Judge Rhodes did caution the Mayor Mike Duggan and City Council President Brenda Jones to not waste this opportunity as this could give Detroit a fresh start and a second chance. He stated that, “Now is the time to restore Democracy to the people of Detroit.”

This bankruptcy case was quite expensive and divisive and was closely followed by the public because of its potential impact on the nation’s municipal bond market and sanctity of public pension funds. A new hearing is to be scheduled to determine how the city will implement cuts and spent the $1.7 billion. There is supposed to be a 14 day waiting period during which objectors can file appeals over the judge’s decision. However, Detroit has requested Judge Rhodes to waive this waiting period.