The city of Detroit today officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy after U.S. Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria required to receive protection from its creditors.
The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities that have hampered Detroit from attacking pervasive blight and violent crime.
Rhodes — in a surprise decision this morning — also said he’ll allow pension cuts in Detroit's bankruptcy. Rhodes emphasized that he won’t necessarily agree to pension cuts in the city’s final reorganization plan unless the entire plan is fair and equitable.
“Resolving this issue now will likely expedite the resolution of this bankruptcy case,” he said.
Rhodes' comments on pension cuts may well prove to be extremely important not just for Detroit, but for any city currently in bankruptcy or considering bankruptcy. Chad Livengood of The Detroit News tweeted quotes from the judge as he delivered the ruling. The judge said that pensions are no different from other contracts under federal bankruptcy laws and "not entitled to any heightened protection in bankruptcy."
That’s a big deal. Pension protectors have been trying to argue that public employee pension benefits can’t be cut back and are protected by state laws or within state constitutions. Federal bankruptcy courts don’t have to care. Cities like Stockton and Vallejo, Calif., have resisted trying to change their pension plans even while in bankruptcy. Maybe this ruling will give city leaders the political courage to address one of their biggest sources of budget debt.
The American Federation of State, County and Municipal Employees have already filed notice that they plan to appeal.
Reason’s Shikha Dalmia highlighted Detroit’s terrible economic state and how it got there in our November Reason magazine feature, “How to Break an American City.” Read it here, along with tales of other failing cities, like San Bernardino, Calif., Harrisburg, Pa., Trenton, N.J., and Chicago.
Below: ReasonTV reports how Detroit's oppressive regulatory structure drives out small businesses: