A UNITED States bankruptcy court judge last night suspended all legal challenges to Detroit’s historic bankruptcy filing while he reviews the city’s plea for protection from creditors.
Judge Steven Rhodes froze all litigation against the bankruptcy, Michigan’s governor, the state treasurer and Kevyn Orr, Detroit’s state-appointed emergency manager. Mr Orr filed the biggest Chapter 9 municipal bankruptcy petition in US history for the city last Thursday.
Detroit’s pension funds have gone to court in an effort to derail the bankruptcy amid concerns that benefits will be slashed for the city’s 20,000 retirees. They claim the bankruptcy threatens their pensions that are protected by the constitution.
Former city firemen, policemen and others fear their pensions could be cut dramatically after Mr Orr last month called for “significant cuts in accrued, vested pension amounts for both active and currently retired persons” in an attempt to address the city’s crushing debts.
Pensions have not been frozen or reduced in the bankruptcy so far, but officials say there are shortfalls in the funds and that payouts could be at risk.
Sharon Levine, a lawyer for a union that represents city workers, had urged Mr Rhodes to let those lawsuits run their course. She said there is no federal insurance for public pensions once they are broken, unlike pensions at private employers.
“Our members who participate at most are at or below $19,000 a year. There is no safety net,” Ms Levine said.
Heather Lennox, a lawyer for Detroit, said that had the lawsuits been allowed to go ahead, “the city would be irreparably harmed”. She added: “These litigants will have due process. They will have their day in court.”
Detroit’s 100,000 creditors are also expected to lose money.
The ruling by Judge Rhodes clears the way for him to determine whether Detroit’s case is eligible to remain in federal bankruptcy court.
The case has attracted massive US media interest, with members of the public lining up to gain entrance to the federal courthouse in downtown Detroit yesterday, forcing court officials to open extra rooms to accommodate the crowd.
The launch of the historic bankruptcy case began exactly 312 years after Detroit was founded – on 24 July, 1701 – by French soldier Antoine de la Mothe Cadillac.
Detroit, a former manufacturing powerhouse and cradle of the US automotive industry and Motown music, has struggled for decades as companies moved away or closed and crime became rampant. Its population has shrivelled by almost two-thirds from the 1950s, to about 700,000 people at present.
The city’s revenue has failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing.
In the next phase of the case, the city must prove that it is insolvent. It will also have to prove it made a good-faith effort to negotiate with its creditors, or that there are too many creditors to make negotiating possible.
Detroit has more than $18bn (about £11.8bn) of debt and unfunded liabilities. That includes $5.7bn in liabilities for healthcare and other retiree benefits and a $3.5bn pension liability.
Alan Schankel, head of fixed-income research at bond specialist Janney Capital Markets, said that pensions and other benefits were certain to be cut.
He said bankruptcy could take “at least a couple of years” to wind its way through the courts, and could have a major impact on the ability of other cities to raise money, especially those in the same state, Michigan, or those with poor credit ratings.