Tuesday 20 March 2018

Detroit allowed bankruptcy plan

Detroit city workers protest outside court while awaiting the bankruptcy decision (AP)
Detroit city workers protest outside court while awaiting the bankruptcy decision (AP)

The city of Detroit is being allowed to shed billions in debt in the largest public bankruptcy in US history.

A court turned down objections from unions, pension funds and pensioners, all of whom could lose under any plan to solve 18 billion dollars in long-term liabilities.

But any plan has still to be revealed. The current ruling followed a nine-day trial over whether Detroit met specific conditions under federal law to stay in bankruptcy court and turn its finances around after years of mismanagement, chronic population loss and collapse of the middle class.

Detroit, which once offered good-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million since then. Tax revenue in a city that is larger in area than Manhattan, Boston and San Francisco combined cannot reliably cover pensions, pensioner health insurance and buckets of debt sold to keep the budget afloat.

The city has argued that it needs bankruptcy protection for the sake of beleaguered residents suffering from poor services such as slow to non-existent police response, darkened streetlights and erratic garbage collections - a concern mentioned during the trial.

Before the filing for bankruptcy, nearly 40 cents of every dollar collected by Detroit was used to pay debt.

Kevyn 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. But by July, Mr Orr and Michigan governor Rick Snyder decided bankruptcy was the best option.

Judge Steven Rhodes' decision to allow it is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in Michigan's Constitution protecting public pensions is not a bulletproof shield in a bankruptcy.

The city says pension funds are short by 3.5 billion dollars. Anxious pensioners getting less than 20,000 dollars a year have appeared in court to plead against cuts. Despite his finding, Judge Rhodes cautioned everyone that he will not automatically approve pension cuts that could be part of Detroit's eventual plan to get out of bankruptcy.

There are other issues. Art possibly worth billions at the Detroit Institute of Arts could be part of a solution for creditors, as well as the sale of a water department. Mr Orr offered just pennies on every dollar owed during meetings with creditors before bankruptcy.

Behind closed doors, mediators, led by another judge, have been meeting with his team and creditors for weeks to explore possible settlements.

Much of the trial focused on whether Mr Orr's team had "good-faith" negotiations with creditors before the filing, a key step for a local government to be eligible for bankruptcy protection.

An appeal against Rhodes' decision is a certainty.


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