Key Ruling on Detroit Bankruptcy Due Tuesday

December 2, 2013 | | Los Angeles Times |

Tens of thousands of Detroiters are waiting anxiously for 10 a.m. Tuesday. That’s when they’ll hear from Judge Stephen Rhodes whether the city is eligible for bankruptcy protection, a decision that could affect pensions, city services and healthcare for residents.

Detroit filed for bankruptcy protection July 18, making it the biggest municipality to file for Chapter 9. But it is up to Rhodes, a federal bankruptcy judge, to decide whether the city negotiated in good faith with creditors before applying for Chapter 9, and whether it was truly insolvent.

Most legal experts expect Rhodes to declare that Detroit is eligible for bankruptcy protection. 

Few argue that Detroit is in bad fiscal shape. A June proposal for creditors mapped out the grim details: Property tax revenue had fallen 20% over the last five years, the general fund runs a growing deficit, and the city was not paying pension contributions as they came due. By the time Detroit filed for bankruptcy, officials estimated the city had $18 billion in debt, although a report by former investment banker Wallace Turbeville of the Demos public policy organization called that figure into question.

The more controversial issue is whether the city negotiated in good faith with creditors before filing for Chapter 9. Unions say that Michigan's Republican governor, Rick Snyder, chose an emergency manager for the city with the idea that the manager, Kevyn Orr, would lead Detroit through bankruptcy, thus shirking some pension obligations. They say that they presented the city with some cuts to pension obligations but that the city would not pursue that avenue. Unions also note that Michigan’s Constitution protects pensions, and argue that bankruptcy is unconstitutional. 

Read the Demos reportThe Detroit Bankruptcy