Detroit can cut pensions and skip debts in epic $18B bankruptcy

DETROIT—A federal judge ruled Tuesday that Detroit can use bankruptcy to cut employee pensions and relieve itself of other crushing debts, handing a defeat to the city’s unions and retirees and shifting the case into a delicate new phase.

Judge Steven Rhodes, who wondered aloud why the bankruptcy had not happened years ago, said pensions can be altered just like any contract because the Michigan Constitution does not offer bulletproof protection for employee benefits. But he signalled a desire for a measured approach and warned city officials that they must be prepared to defend any deep reductions.

“This once proud and prosperous city can’t pay its debts. It’s insolvent,” Rhodes said in formally granting Detroit the largest public bankruptcy in U.S. history.

Rhodes agreed with unions and pension funds that the city’s emergency manager, Kevyn Orr, had not negotiated in good faith in the weeks ahead of the July filing, a key condition under federal law. But he said the number of creditors—more than 100,000—and a wide array of competing interests probably made that “impossible.”

Detroit “could have and should have filed for bankruptcy long before it did. Perhaps years,” the judge said.

The decision set the stage for officials to confront $18 billion in debt with a plan that might pay creditors just pennies on the dollar and is sure to include touchy negotiations over the pensions of about 23,000 retirees and 9,000 workers. Orr says pension funds are short by $3.5 billion.

Rhodes promised that he would not “lightly or casually” sign off on just any cuts.

The city has argued that bankruptcy protection will allow it to help beleaguered residents who for years have tolerated slow police responses, darkened streetlights and erratic garbage pickup—a concern mentioned by the judge during a nine-day trial that ended Nov. 8.

Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city.

Orr praised the judge’s ruling and pledged to “press ahead.” He also acknowledged that pensions would be a sensitive issue because they represent a “human dimension” to the crisis, with some retirees getting by on less than $20,000 a year.

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.”

Rhodes has told the city to come up with a plan by March 1 to exit bankruptcy. Orr has said he would like to have one ready weeks earlier.

The city is so desperate for money that it may consider auctioning off masterpieces from the Detroit Institute of Arts and selling a water department that serves much of southeastern Michigan.

“We need to recognize that this decision is a call to action,” Gov. Rick Snyder, who supported the bankruptcy filing, said. “We are confronting fiscal realities that have been ignored for too long.”

Minutes after the ruling, a union lawyer said she would appeal. City officials got “absolutely everything” in Rhodes’ decision, she told reporters.

“It’s a huge loss for the city of Detroit,” said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, which represents half of city workers.

Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. By July, Orr and Snyder decided bankruptcy was Detroit’s best option.

Detroit, a manufacturing hub that offered well-paying blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million people since then. The city does not have enough tax revenue to reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat.

Associated Press Writer Corey Williams contributed to this story.