Judge won’t push the city to cut public pensions or sell artwork from the Detroit Institute of Arts, but admitted nothing is off the table.
After a nine-day bankruptcy eligibility trial, U.S. Bankruptcy Judge Steven Rhodes ruled on Tuesday that Detroit can file Chapter 9 bankruptcy in order to escape the some $18 billion the city has accumulated in debt.
During a 90-minute explanation of his ruling, Rhodes acknowledged the historic context of the ruling, since Detroit would be the largest municipality to file bankruptcy in American history, and added that this appears to be the only option for a “proud and once prosperous city” that can no longer pay its debts or take care of its citizens.
According to a report from Reuters, about 40 percent of the city’s streetlights do not work; there are about 78,000 abandoned buildings in the city, whose population has dwindled from 1.8 million in 1950 to 700,000 current residents; and “The city no longer has the resources to provide its residents with basic police, fire and EMS services,” Rhodes said, noting that the average police response time is 58 minutes, which is reportedly more than five times the national average of 11 minutes.
“Without the protection of Chapter 9, the city will be forced to continue on the path it was on before this case,” Rhodes said, adding that “The court finds that Detroit was and is insolvent,” and that “the city was generally not paying its debts as they became due.”
Rhodes said the city’s bankruptcy filing was inevitable: “Cities often wait longer to file for bankruptcy than they should have, and the city of Detroit was no exception.”
While Rhodes said that he won’t necessarily allow the city to cut public employees’ pensions or sell paintings and sculptures from the Detroit Institute of Arts, nothing has been taken off the table, which has not only been concerning for the some 48 unions in the city, but unions nationwide.
Detroit’s emergency manager Kevyn Orr applauded the ruling, saying that the city needs to work fast and file a “plan of adjustment” in the next few weeks that will restructure the city’s debt and alter how the local government operates.
Although a draft of the proposal has yet to be released, the plan is already controversial, since it is expected to include cuts to unsecured creditors and sales of the city’s assets, including the water and sewer department and the Detroit Institute of Arts’ property.
“Time is of the essence, and we will continue to move forward as quickly and efficiently as possible,” Orr said. “We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens.”
Orr added that while the city is “trying to be very thoughtful, measured and humane,” in determining what and how much to cut, he said the cuts are necessary, including those made to the pension funds. He pointed out again that before Detroit stopped trying to make debt payments, nearly 40 cents of every dollar the city spent was going toward debt service payments.
“That’s just not sustainable because in the next three or four years, that number is going to go to 65 percent,” Orr said.
Detroit’s Mayor Dave Bing made similar statements throughout the day, saying that the ruling will be beneficial to the city in the long run. “There’s going to be a lot of pain for a lot of different people,” he said. “But in the long run, the future will be bright.”
End of public pensions?
Though Rhodes said he would allow pension cuts in the city’s bankruptcy filing, the judge added that he won’t agree to the cuts unless the entire plan to turn the city’s financial health around is “fair and equitable.”
Talking to the Detroit Free Press, American Federation of State, County and Municipal Employees attorney Sharon Levine said that the union plans to appeal the ruling since “we do believe that Chapter 9 is unconstitutional,” and the city didn’t negotiate with the AFSCME and other unions in “good faith.”
“We do believe that the pensions, importantly, are constitutionally protected,” Levine said, adding that the facts in the case are not clear, which even the judge took note of in his ruling.
While Levine said the AFSCME recognizes Detroit has financial issues, she said that delaying a bankruptcy filing by a few months if it means allowing public employees to keep their pensions is something worth fighting for.
“Remember, this is a municipal bankruptcy,” Levine said. “There is no safety net for retirees who average an annual pension of $19,000,” and now there is talk about cutting these pensions down to $8,000 or $9,000, which is worrisome to retirees who don’t know how they will afford house payments, food, medicine.
Lee Saunders, president of the AFSCME, agreed with Levine and said that it is “morally corrupt to attack retirees getting $19,000 a year,” not to mention that pensions are guaranteed in the constitution.
“These folks live day to day,” Saunders said. “Just imagine how they’re feeling. Now they’re facing a possible cut and there’s no telling what it might be. They’ll be making choices between putting food on the table or buying necessary medications. It’s just nuts. It’s inhumane and it’s morally wrong.”
Levine said that for those in the private sector the federal government has created the Pension Benefit Guaranty Corporation as a safety net for retirees, guaranteeing private employees a $57,000 pension — a luxury that has not been awarded to any public sector employees, who may not be eligible for social security.
“It’s a very desperate situation,” she said.
Rhodes addressed the constitutionality of the cuts to pension plans in his ruling, and said that while Michigan’s constitution protects public pension benefits, these contracts can be impaired in the event of a municipal bankruptcy.
According to Detroit officials, about half of the city’s liabilities are retiree benefits, with $5.7 billion coming from retiree healthcare costs and another $3.5 billion from pensions.
Although an appeal has already been filed, and more are anticipated in the next few days, Robert Gordon, a lawyer at the law firm Clark Hill, who is representing the city’s pension funds, said that bankruptcy code allows the Chapter 9 proceedings to continue.
John Pottow is a bankruptcy law professor at the University of Michigan. He said that based on his ruling, Judge Rhodes is urging the city to reach an agreement with its creditors but gave the city bankruptcy as a final option.
“Bottom line: he’s pushing negotiation,” Pottow said.
But union leaders are wary that the city will negotiate in good faith, since city and state officials, including the state’s Republican Gov. Rick Snyder, have failed to do so thus far.
Freed from debt at the cost of culture
Another large point of contention in Rhodes’ ruling was that it did not prohibit Orr from selling the city’s art collection, which has been called one of the finest in the country.
While Rhodes cautioned Orr that “A one-time infusion of cash by selling an asset” would only delay the city’s “inevitable financial failure,” as it is not a sustainable solution, Rhodes will allow the sale of paintings and sculptures from the Detroit Institute of Arts.
Some city officials and creditors have argued that art is not a necessity for a city, including Derek Donnelly, the managing director of the Financial Guaranty Insurance Company, a creditor, who said that “The D.I.A. or art is not an essential asset and especially not one that is essential to the delivery of services in the city.”
He and other creditors reportedly filed a motion last week to allow for an appraiser to examine the collection, which includes pieces by artists such as Bruegel, van Gogh and Cézanne.
Orr hired the famed auction house Christie’s to appraise about 2,000 pieces earlier this year, and the official values of the museum’s pieces are expected to be publicized in the coming weeks. But Orr told the Detroit Free Press on Tuesday that in “preliminary discussions” with Christie’s, 496 pieces were valued at less than $2 billion, a figure much lower than anticipated.
Still, Orr said they will try to get some value from the art in some manner, which could include using the art as collateral for loans, or charging a fee to lend the pieces to other museums.
Museum officials have publicly argued against the sale of the pieces and said that they will go to court to prevent the sale of any pieces. They argue that if the pieces are sold, the museum will lose its appeal and the city will lose a “crucial stream of tax revenue,” which museum director Graham W. J. Beal said would likely lead to a “nonprofit controlled liquidation” of the museum.
Michael G. Bennett, an associate professor of law at Northeastern University School of Law, agrees with the museum officials and said “even if sales from the institute generated a lot of money — let’s say $900 million or even $1 billion — it’s still not going to solve the city’s problem in any fundamental way, and it could end up contributing to more problems down the road.”