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Judge hears arguments over whether Detroit is eligible for bankruptcy

People, mostly union and retired city workers, protest in front of the U.S. Courthouse where Detroit's bankruptcy eligibility trial began this morning October 23, 2013 in Detroit, Michigan. A federal judge will decide if the City of Detroit is even eligible to be in bankruptcy court.

U.S. Bankruptcy Court Judge Steven Rhodes will hear arguments today in Detroit over whether the city has the right to avail itself of municipal bankruptcy. It would be the biggest Chapter 9 bankruptcy ever in the U.S.

Kevyn Orr, the emergency manager appointed by Michigan Governor Rick Snyder to resolve Detroit’s fiscal crisis, claims that Detroit cannot possibly pay for the $18 billion in long-term liabilities it has accumulated. Orr and lawyers for the city insist Detroit is insolvent, and must be allowed to reduce its debts to balance anticipated tax revenues with future obligations.

But unions for city employees, as well as pension funds and retirees, are trying to block the bankruptcy in court. They claim that the emergency manager didn’t negotiate with its unions in good faith to reduce pension and health-care obligations going forward; that the state constitution prohibits the city from abrogating its contracted obligations to current and former workers; and that the city is not in fact insolvent, since it has assets such as utilities and artwork at the Detroit Institute of Arts that it could sell.

“Unions and the pension fund members are watching this case very closely around the country,” says Jeff Horner, lecturer in urban planning at Wayne State University in Detroit. “If this bankruptcy is approved, this could set the tone for other cities to avail themselves of bankruptcy law to divest themselves of debt.”

Horner says Detroit has plenty of other work to do, aside from reducing its long-term liabilities, and addressing past corruption and mismanagement. He says the city needs to share services and tax revenues with wealthier suburbs -- as has been done in other struggling urban areas. “Cleveland, Indianapolis, Minneapolis have been regionalizing,” Horner says. “They’ve seen the writing on the wall with the loss of their industrial base, and they’re now in better shape than Detroit.”

Horner points out Detroit does have some advantages at this point -- skilled and educated workers, and low rents for startup businesses.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.
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