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Detroit Seeks Bankruptcy Protection; Judge Orders Halt

2 min readBy: Joseph Bishop-Henchman

Last Thursday, Detroit sought bankruptcy protection by filing a Chapter 9 petition in federal court. The action, while not surprising, is unique: Detroit is easily one of the most prominent cities on the list of municipal bankruptcies, and because Michigan’s emergency manager law is designed to keep municipalities out of bankruptcy. The law, passed in 1990, empowers the Governor to appoint an Emergency Manager to restructure the finances and operations of cities nearing bankruptcy—and Governor Snyder did so for Detroit in March 2013.

Part of the reason Detroit sought federal protection is a conflict between the 2012 Michigan law permitting bankruptcy filing and a Michigan constitutional provision (Article IX, Section 24) protecting government employees’ pensions from diminution. The city stands $18.5 billion in debt, including $5.7 billion in unfunded public employee health benefits and $3.5 billion in unfunded public employee pension obligations. Creditors, unions, and city officials have spent the last few months trying to reduce this crushing burden as the city ran out of money to provide basic services. Police response times last year averaged 58 minutes, only 8.7 percent of crimes were solved, and the city only has 14 working ambulances for a population of 700,000.

Kevyn Orr, the Emergency Manager, filed the Chapter 9 petition minutes ahead of a gaggle of lawyers for the city’s pension funds, who were seeking a restraining order preventing a bankruptcy filing from state judge Rosemarie Aquilina. Judge Aquilina on Friday ordered Orr to withdraw the petition, holding that because bankruptcy will likely diminish vested pension rights, it violates the Michigan Constitution for the city to enter bankruptcy. Orr is appealing the order, and presumably a higher judge will concede that federal law supersedes state restrictions.

Aquilina melodramatically added a handwritten line to her printed order: “A copy of this Order shall be transmitted to President Obama.” In court, the judge predicted that Obama would eventually step in to rescue the city (or more accurately, rescue the pension funds). That remains unlikely: while Detroit’s situation is acute, it is not the only city or state with huge unfunded pension or retiree health obligations. Bailing out one means bailing out others. The White House confirmed Friday that no bailout is coming.

The judge is wrong in holding that the bankruptcy filing diminishes promised pensions. They’ve already been diminished, back when the city promised to pay money it didn’t have. Anything anyone does now isn’t going to make that money reappear. It’s already gone.

After the pensions, the second most controversial topic with Detroit’s bankruptcy is the $2.5 billion in art the city owns in its museums. Some say the museums are an island of greatness in a city of trouble and shouldn’t be touched; others say that the collections should be sold to raise cash the city desperately needs for basic services.