Watching the Tigers lose to the Red Sox on Saturday was a little sad because if anyone needs a win, it is the city of Detroit. Saddled with massive debt and struggling to deliver basic services to its citizens, no one can deny that the city is in trouble. Now the question looms: is it bankrupt? U.S. Bankruptcy Judge Steven Rhodes started hearing arguments on Wednesday morning in the largest municipal bankruptcy filing in U.S. history—the City of Detroit wants to file for Chapter 9 bankruptcy.
The trial pits Detroit’s emergency manager and his legal team against unions and pension funds that claim the city isn’t qualified to clear its books for a fresh start under Chapter 9 bankruptcy. The conflict centers on whether or not the city entered into good-faith negotiations with pension funds and unions. Arguments for the city include that Detroit had proper authorization to file the case and needed to do so because it is insolvent. Further, the city argues that it negotiated in good faith with its creditors or, in the alternative, that the city has so many creditors that such negotiations were not feasible. Finally, Detroit will argue that it needs bankruptcy protection in order to deal with $18 billion in debt and other liabilities.
On the other side, the unions and pension are “challenging Detroit on the eligibility question. They claim emergency manager Kevyn Orr, who acquired nearly unfettered control over city finances following his appointment by Michigan Gov. Rick Snyder, was not genuinely interested in negotiating when they met with his team in June and July. Orr insists pension funds are short $3.5 billion and health coverage also needs to be overhauled.”
Earle Erman, attorney for Detroit’s public safety unions, said the city has cut wages and changed health care benefits without across-the-table talks. Lawyer Sharon Levine, who’s representing the American Federation of State, County and Municipal Employees, said the city spent months “mapping out its path to Chapter 9,” not looking for compromises that could keep Detroit out of bankruptcy.
Objectors have argued that Chapter 9 is unconstitutional and that Michigan’s constitution protects pensions from being slashed. And unions, pension funds and retirees, which have all filed objections to the bankruptcy, are expected to argue that the city is not insolvent.
The general sense in the bankruptcy community is that Judge Rhodes will likely find Detroit eligible. However, “his ultimate ruling is hardly a foregone conclusion,” and added pressure comes in the form of about 300 protesters on Wednesday. The protestors held signs and chanted slogans calling for a solution that made banks and not people suffer payment cuts the city must make.