CNN reports that the judge in the Detroit bankruptcy case has ruled Detroit can file bankruptcy, allowing for the Motor city to potentially slash pension payments and other debt obligations owed to city employees, retirees, investors and other creditors.
This news comes despite heated protests from pension fund recipients and union officials that Detroit did not have the legal right to file bankruptcy, regardless of Detroit’s financial troubles. These groups argued that despite some negotiations prior to filing bankruptcy, the city’s efforts did not constitute “good faith efforts” to settle liabilities owed to creditors.
What did the judge rule in the Detroit bankruptcy case?
According to the Judge Steven Rhodes, the city did not negotiate in good faith with creditors, but he acknowledged, given the high number of creditors, this requirement was simply impractical. Detroit is said to have at least 100,000 creditors. In the end, the judge believes the bankruptcy petition was filed properly and has legal merit.
With the ruling Detroit hopes to avoid hundreds of potential lawsuits from creditors, some of which had already been filed prior to the bankruptcy filing. The bankruptcy filing initiates a bankruptcy automatic stay which protects Detroit, potentially eliminating the right of some creditors to seek repayment for their debts. But don’t expect this to be the end of the story, several of the unions, including American Federation of State, County & Municipal Employees, plan to appeal the judge’s decision.
History of financial troubles in Detroit
Detroit was once the manufacturing capital of the United States, frequently called the Motor City. Over the last several decades, however, the population has declined, businesses have left the city and the housing market crashed. What’s left is high crime, limited employment opportunities and poor city services.
Michigan Governor Rick Snyder knew that something had to be done so he appointed an Emergency Manager, Kevyn Orr, in March. Despite the city’s efforts to reduce the city’s debts, it wasn’t enough. Orr argued from the beginning that deep cuts to the pension plans and health coverage for city workers would have to be slashed or Detroit would not recover.
What about pension benefits?
Now that the judge has ruled that Detroit can proceed with their bankruptcy, pension cuts are likely to follow. Experts were watching this ruling specifically because Michigan’s state constitution bars pension cuts, but the judge argued that federal bankruptcy laws which require all creditors to be treated equally, allows for pension cuts, though the judge noted that just because the city recommended cuts it does not mean the judge would approve them.
History is on the side of pensioners. CNN reports that no municipal bankruptcy has ever resulted in involuntary cuts to pension benefits. Even recent cities which have declared bankruptcy have exited from bankruptcy without slashing pension obligations.
What’s next? Orr stated that the city will begin negotiating with creditors to create their bankruptcy repayment plan. He has acknowledged that there is work that needs to be done with all creditors to reach a “consensual resolution.”
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