Pensions Aren’t Sacred and Art Isn’t Priceless: What the Detroit Bankruptcy Ruling Means

A federal judge's ruling clears the way for Detroit to proceed with the largest municipal bankruptcy in U.S. history

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For 90 minutes Tuesday, as snow fell on protesters outside, Judge Steven Rhodes laid out his rationale for allowing Detroit to seek the biggest municipal bankruptcy in American history.

“This is indeed a momentous day,” Rhodes told the hushed courtroom. “We have a finding that this proud and once prosperous city cannot pay its debts.”

By the time the soft-spoken federal judge had finished, it was clear that from worker pensions to the city’s art treasures, nothing in Detroit is completely safe in Chapter 9 bankruptcy.

The effect of his ruling is likely to touch all corners of the city and could serve as a legal precedent for other municipalities reckoning with unsustainable debt. Here are three of the most important takeaways:

Pensions Aren’t Sacred. Lawyers for the city’s 48 organized-labor groups argued strenuously that Michigan law protected state employees’ pensions. Rhodes disagreed, noting that the state’s constitution classified pensions as a contractual obligation on cities’ part, not something requiring special treatment.

That means the city can treat pensions like any other potentially voidable contract. Expect it to do so. On Tuesday afternoon Detroit’s emergency manager, Kevyn Orr, said he couldn’t fix the city’s financial problems simply by restructuring the debt owed to banks. “It can’t be done without impacting pensions,” Orr said.

There’s No Such Thing as Priceless Art. The prospect of selling treasured pieces from the collection of the Detroit Institute of Arts has raised alarm among art lovers and citizens who worry the city would be using its cultural heritage to service its debt.

In his ruling, Rhodes gave Orr the leeway to pursue such a move, though he cautioned the emergency manager against holding the equivalent of a fire sale. In unloading assets, Rhodes said, a debtor needs to take “extreme care” to be sure a sale is absolutely necessary.

Orr told the Detroit News that an initial evaluation of 496 pieces placed their value at under $2 billion, less than many thought the works would bring. A Christie’s appraisal of all the artwork owned by the city is expected to be finished in two weeks.

The Unions Were Right, but That Didn’t Matter. Although Detroit’s unions failed in their main goal, they won a Pyrrhic victory when Rhodes agreed that the city had failed to bargain in “good faith.”

The judge admonished Orr (who was not present) for trying to pass off a swift series of meetings ahead of July’s bankruptcy filing as a true negotiating effort. Rhodes, however, accepted Orr’s argument that it was impractical to meet with all 48 unions and 100,000 creditors before the bankruptcy filing took place, even though unions said he could have made a greater effort.

A visibly upset Sharon Levine, who represents the American Federation of State, County and Municipal Employees in the case, said her group planned to appeal Rhodes’ ruling to the Sixth Circuit Court in Cincinnati and beyond that, to the U.S. Supreme Court if necessary.

In ruling that Detroit could proceed with its bankruptcy anyway, Rhodes showed that a failing by city officials with labor groups wasn’t enough to offset the overwhelming need for the case to go on.

“For the image of labor, Detroit is a catastrophe,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass. “The aristocrats of labor have become the paupers of labor. What affected yesterday’s manufacturing workers is now affecting policemen and firefighters. Nobody is safe.”

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