Detroit's bankruptcy will move forward as planned. US Bankruptcy Judge Steven Rhodes ruled that the city of Detroit is insolvent and therefore eligible for Chapter 9 bankruptcy. In his decision, Rhodes determined that the city has too many creditors to negotiate payments in good faith.
The judge further determined that the city is not obligated to sell off assets before the bankruptcy proceeds. As part of the plan, city leaders must present a budget, including cuts totaling $18 billion, by the end of the year.
Judge Rhodes also explained that City Emergency Manager Kevyn Orr misled residents about the security of their pensions. The Wall Street Journal reports that the judge ruled the pensions are not exempt from potential cuts, which could occur throughout the bankruptcy proceeding.
Michigan's constitution prohibits the reduction of pension benefits -- except in the case of bankruptcy. Unfortunately, the city simply does not have enough funds to cover the obligation. Rhodes discussed the state law in his ruling, pointing out that pension funds are not provided "any extraordinary attention" when compared to other outstanding debt.
Those who control local unions and pensions funds have the right, and are expected to, appeal the judge's decision.
Detroit's bankruptcy lists nearly $18 billion in debt, including more than $3 billion in city pension obligations. Officials say the city has operated under a deficit since 2008. Declining population and a reduced tax base have only contributed to the deficit.
As reported by the New York Times, Detroit is the largest US city to qualify for bankruptcy protection. Although bankruptcy has a negative connotation, Judge Rhodes pointed out that it is also "an opportunity for a fresh start."
Some officials believe the "fresh start" has already begun. Emergency Manager Kevyn Orr is credited with taking measures to reduce crime, remove abandoned structures, and fund small businesses.
While Detroit's bankruptcy is not an ideal option, it is a step toward rebuilding what was once a great city.
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