Judge: 'Now is time to restore democracy to the people'

Robert Snell, Christine Ferretti, Steve Pardo, Chad Livengood
The Detroit News

In a bankruptcy case about numbers — $18 billion in debt, 32,000 pensioners, 35,000 broken streetlights — a judge needed 75 seconds Friday to approve a plan to undo decades of financial decline.

U.S. Bankruptcy Judge Steven Rhodes went on to deliver a nearly two-hour speech sprinkled with sympathy for residents of the insolvent city and praise for a plan to shed $7 billion in debt, shield the city's art collection and minimize cuts to retiree pensions.

Rhodes read from a 50-page script that laid out the legal reasons why Detroit's bankruptcy plan was feasible, fair and in the best interest of creditors, and spoke directly to residents angry about losing money and elected representation.

Anger can be good, the judge said, vowing democratic rule soon would be returned to Detroit.

"I urge you now not to forget your anger," Rhodes said. "Your enduring and collective memory of what happened here, and your memory of your anger about it, will be exactly what will prevent this from ever happening again. It must never happen again."

Rhodes' ruling capped Detroit's nearly 16-month trip through the largest municipal bankruptcy in U.S. history that began with fear and anger, and ended with retirees and other major creditors agreeing to sacrifices that spared the city and region a lengthy legal battle.

His decision drew widespread praise from both public and private sector leaders, from automakers to foundations who committed millions to help settle the bankruptcy. Emergency Manager Kevyn Orr called the ruling a "legal tour de force."

Rhodes spoke about "inhumane" city services and the loss of democracy. Mayor Mike Duggan was listening, sitting in the front row next to City Council President Brenda Jones, who sat behind Orr, the architect of the plan to revitalize an iconic industrial town that became the biggest American city to go broke.

"This will cause real hardship and, in some cases, it is severe," Rhodes said. "This bankruptcy, however, like most, is about shared sacrifice that is necessary because the city is insolvent and desperately needs to fix its future."

The judge's emotional appeal to Detroit's nearly 680,000 residents came with a blunt warning to elected city leaders not to waste the opportunity.

"We give the city back with the fresh start and second chance the city needs," Rhodes said.

The judge concluded Detroit's plan for offloading decades of accumulated debt was fair, feasible and in the best interests of creditors, particularly residents who endure an inferior level of city services.

"Detroit's inability to provide adequate municipal service runs deep and has for years," Rhodes said. "It's inhumane and intolerable and it must be fixed. This plan can fix these problems."

Rhodes acknowledged retirees and the suffering they will experience through reductions in their monthly pensions ranging from 4.5 percent to 20 percent.

For some residents, the anger remained.

"This whole thing is horrible," said retiree William Davis, who spent 34 years working in the Detroit Water and Sewerage Department. "The money is coming from the backs of the retirees."

A pillar of Detroit's debt-cutting plan is the so-called "grand bargain," which will shield the Detroit Institute of Arts collection from creditors and soften pension cuts to city retirees.

The grand bargain required state legislation and includes $195 million from the state and $466 million from foundations, corporations and private donors.

Rhodes said the grand bargain "borders on the miraculous."

The grand bargain will pump the equivalent of $816 million into the city's pension funds over the next 20 years through contributions made by private foundations, state taxpayers and private donors to the DIA.

"No one could have foreseen this settlement when the city filed its case," Rhodes said.

The debt-cutting plan is "an ideal model" for rebuilding a broken city, the judge said. It includes $1.7 billion to tear down burned-out homes, buy new police cars and fire trucks, and bankroll new computer systems.

The approval pushes Detroit to the brink of exiting bankruptcy court in a decision that comes 15½ months after Gov. Rick Snyder approved a bankruptcy petition triggered by population loss, a dwindling tax base, corruption, mismanagement and financial problems.

Just down the hallway from Rhodes' courtroom, Snyder watched the judge's speech via a closed-circuit feed inside the private chambers of Chief U.S. District Judge Gerald Rosen. Rosen is the architect of the "grand bargain" settlement credited with helping speed Detroit through through bankruptcy.

The decision was watched closely by retirees, Wall Street banks and officials in struggling communities nationwide.

Rhodes called Detroit's bankruptcy plan "an ideal model for future municipal debt restructurings."

The judge said litigation surrounding whether the art could be sold or if the state could be on the hook for paying $3 billion in pension claims would be "long, complex and expensive."

Rhodes also rejected arguments made by a small group of holdout creditors that the city should sell pieces of its art collection or borrow against the value of the masterpieces housed in the Woodward Avenue museum to satisfy debts.

"To sell the DIA art would be to forfeit Detroit's future," Rhodes said.

"The city made the right decision."

He was impressed by testimony that the museum's art was held in a public trust and the donor restrictions prevented an art sale.

Rhodes also approved a slew of deals negotiated on the sidelines of the bankruptcy case with creditors including bondholders and bond insurers.

The city will remain under several layers of oversight to ensure Detroit does not slide back into insolvency. That oversight includes a nine-member financial review commission that includes two people from Detroit.

That is a mistake, Rhodes said, and he urged Snyder to eliminate the two city positions, calling city input a potential conflict that could undermine the process.

After the ruling, Duggan defended the makeup of the commission.

Under the terms of the grand bargain, the state's $195 million contribution to the pension funds absolves the state of any legal liability to pay for Detroit's pensions under the state's constitution.

Rhodes signaled that the state's contribution was just enough to win his approval.

He called it "the lowest end of the range of reasonable settlements."

In a direct appeal to Snyder, the judge said the state has a "legal and moral obligation" to ensure municipal employee benefits in Michigan are adequately funded.

"If the state fails, history will judge that this court's approval of that settlement was a massive mistake," Rhodes said.

Snyder, who was re-elected Tuesday, said his administration has been examining the pension and retiree health care liabilities of other communities to try to avert future financial calamities that led to Detroit's bankruptcy.

"I take his comments very seriously and it was an amazing opinion," Snyder said at a news conference.


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