A federal bankruptcy judge granted Detroit unprecedented powers Tuesday to shed billions of dollars in debt, including the ability to slash city employee pensions despite a state constitutional provision protecting them.
In approving the nation's largest-ever municipal filing, Judge Steven Rhodes cleared the way for Detroit's emergency manager to develop a plan to reorganize the city's estimated $18 billion in debt. Beyond cutting worker pensions and retiree health benefits, the city could stiff bondholders and sell city assets such as its water and sewer authority and its priceless art collection.
Municipal bankruptcy experts called particular attention to Rhodes' decision to allow pensions to be put on the chopping block. Some said the move would set a precedent for future municipal bankruptcies. And unions vowed to appeal the decision.
"This is the first opinion of its kind where a bankruptcy court has directly expressed the view that the supremacy of U.S. bankruptcy laws trumps state constitutional protections of public pension holders," said Mark Kaufman, senior partner at McKenna, Long & Aldridge, an Atlanta law firm. "The implications of that decision are significant not only to Detroit but also potentially to other cities gauging their level of fiscal distress and how to deal with it."
The decision to approve Detroit's bankruptcy petition capped four months of legal wrangling triggered when the city's emergency manager, citing overwhelmed city services, mounting debt, and dwindling tax revenue, filed for bankruptcy protection in July.
"This once proud and prosperous city can't pay its debts," Rhodes said from the bench. "It's insolvent. It's eligible for bankruptcy. At the same time, it also has an opportunity for a fresh start."
Detroit's efforts to get out from under its mountain of debt still faces determined opposition from a broad range of interests, including city workers, retirees, bondholders, and others who stand to be hurt financially if the city does not pay all of its bills.
"The only thing we can do is challenge this ruling legally and question the morality of attacking pensions that have been earned by these workers," said Lee Saunders, president of the American Federation of State, County and Municipal Employees, which represents many of Detroit's 9,500 city workers. "Pensions in Detroit average $19,000 a year, and there is a good possibility that they will be reduced. That is dead-ass wrong and morally corrupt."
City workers and retirees also expressed dismay, saying any cuts would be too much.
City truck mechanic Mark Clark, 53, said he may look for another job after absorbing pay cuts and higher health-care costs. Now a smaller pension looms.
"Most of us didn't have too much faith in the court. . . . The working class is becoming the have-nots," Clark said outside the courthouse. "I'm broke-up and beat-up. I'm going to pray a whole lot."
Under municipal bankruptcy law, Detroit's emergency manager, Kevyn Orr, will begin exploring ways to pay some of its debt while restoring and improving city services. Although Orr can propose a reorganization plan that pays creditors only a portion of what the city owes them, creditors have a right to contest it. They can also press the city to sell assets or otherwise to look for ways to minimize their financial damage. Given that, bankruptcy negotiations are expected to drag on for months.
Ultimately, a reorganization plan would have to be approved by the bankruptcy judge. And although Orr has said pension cuts are necessary, Rhodes made it clear he would allow them to go forward only if the overall plan is "fair and equitable."
That legal standard has never been tested in a municipal bankruptcy, putting the case in uncharted legal territory, said Kaufman, who is lead counsel to a state-appointed receiver overseeing fiscally distressed Harrisburg. "There have been no legal precedents to guide what fair and equitable is in this context," he said.
Next Moves for Detroit
A judge's decision to allow Detroit to fix its finances in bankruptcy court raises a flurry of questions about what happens next. Here's a look at what's known about the next steps:
What happens in court?
Bankruptcy opponents want to file appeals immediately to the U.S. Circuit Court of Appeals for the Sixth Circuit in Cincinnati, a move that could put the case on hold. They believe Judge Steven Rhodes is wrong in saying pensions can be cut, among other issues.
What happens in Detroit?
The judge has told the city to come up with a plan to exit bankruptcy by March 1. But the city's emergency manager, Kevyn Orr, says he'd like to have one ready weeks earlier. The plan could include anything from selling assets, such as art, to cutting pensions and more. Detroit would need the support of creditors and the judge to emerge from bankruptcy.
How long will it take?
Detroit is by far the largest city to go bankrupt and the timeframe isn't known, especially because of appeals. Orr would like to get it done by next fall when his term ends as manager. Experts also warn the city's legal bills and those of creditors will soar.
Will the lights go out?
Orr says a ruling in favor of bankruptcy will allow the city to keep paying bills incurred since July 18. And it can keep police on the streets, firefighters on duty, and streetlights aglow. City leaders have said those services have improved since the city filed for bankruptcy and police response times were near an hour. - APEndText
Pension Overhaul in Illinois
The Illinois legislature approved a historic plan Tuesday to eliminate the state's $100 billion pension shortfall, with a vote that drew union threats of a court fight but that supporters said was key to repairing the state's deeply troubled finances.
After a Senate vote of 30-24, the House approved the plan, 62-53, sending it to Gov. Pat Quinn, who has said he will sign the measure. Officials say the overhaul will save $160 billion and erase the state's pension debt by 2044.
Public employee unions vowed quick legal action. They say the legislation is unfair to workers and retirees who for years paid into the system but will now pay for others' mistakes.
Illinois' unfunded pension problem is considered the worst in the nation, primarily because lawmakers failed for decades to make the state's full payments to the funds.
The measure pushes back the retirement age for workers ages 45 and younger. The annual 3 percent cost-of-living increases for retirees would be replaced with a system that provides increases on a portion of benefits, based on how many years a beneficiary is in the job. Some workers would have the option of freezing their pension and starting a 401(k)-style plan.
As a carrot in exchange for the changes, public workers are to see their pension contributions fall by 1 percent. - APEndText