Federal judge rules Detroit bankruptcy filing may proceed

The U.S. judge overseeing Detroit's bankruptcy case ruled Tuesday that the city could proceed with its filings to deal with billions in debt, a decision that will likely cause a long-term fight with the city's unions, and may allow Detroit to sell off some of its most prized assets.

Noting that the city "no longer has the resources to provide its residents with basic police, fire and services," Judge Steven Rhodes said Detroit was insolvent, and could therefore file Chapter 9 bankruptcy in order to help pay down $18 billion in debt.

While Rhodes ruled that the city could cut the pensions of Detroit's 23,000 municipal workers, he also cautioned that Detroit should not use the bankruptcy as an excuse to sell off assets like artwork from its large museum, the Detroit Institute of Art, for a quick cash infusion.

The city's final plan will need to be approved by Judge Rhodes, who also warned that he wouldn't approve overly severe cuts to pensions.

The decision was met with protests by dozens of city workers outside the courtroom, employees who don't want to see their pensions cut and who have already faced deferred payments on their pensions.

The American Federation of State, County and Municipal Employees Council 25 had argued that the city had not proven it was insolvent and had not negotiated in good faith with its creditors. AFSCME 25 immediately filed a notice of appeal to the bankruptcy court, which is the first step of a legal challenge to the judge's ruling.

"You're putting your house in order based on what your pension is when you retired and now someone is saying, "to hell with that we can change that number whenever we want,'" said Ed McNeil, the chief negotiator for AFSCME 25. "It's disheartening for the people who put in years of work."

Judge Rhodes said that because of the number of creditors Detroit is indebted to and the complexity of Detroit's finances, negotiating in good faith before a bankruptcy would have been impossible.

But some union leaders seemed ready to negotiate, instead of challenging the ruling.

"The city has to step up now and negotiate more reasonable and more fairly," Lynn Brimer, an attorney for the Detroit Retired Police Members Association, told the Detroit Free Press.

While unions reacted to the ruling almost immediately, a restructuring plan to address the city's financial woes will likely take months or even years to implement.

The city's state-appointed emergency manager Kevyn Orr said the city would submit a plan to pay down its debt to put itself on stable financial footing in the coming weeks.

Orr and Detroit Mayor Dave Bing said they wouldn't rule out selling some of the Detroit Institute of Art's works to pay off debt. But, according to some valuations, even if the museum sold off hundreds of its most valuable pieces, it would only raise about $1 billion.

The museum currently receives no funding from the city.

Between the controversial monetization of city assets, negotiations with unions, and possible challenges to Rhodes' ruling, Detroit's path to insolvency is poised to be a long one.

Still, the decision will likely have immediate ramifications beyond Detroit.

"The big impact of the decision is now there's federal precedent that says federal bankruptcy law overrides state protections over pensions," said Jennifer Bradley a fellow at the Brookings Institution who has studied Detroit's financial woes. "That's going to reverberate through the system."

Bradley said the judge's decision means other financially beleaguered cities will now have the upper hand when negotiating with unions.

"The cities can now say, 'if we go to bankruptcy, it's not going to be better for you,'" she said. "The decision means pensions are not a special protected class. That sort of shifts the power."