Detroit formally declared bankrupt

A federal judge on Tuesday formally declared Detroit bankrupt, a landmark ruling that clears the way for potentially sweeping cuts to city worker pensions and retirement benefits and for steep and possibly precedent-setting losses to the cash-strapped city's bond holders.

The ruling by U.S. Judge Steven Rhodes, who cited the city's dismal finances and $18 billion owed to a multitude of creditors in support of his decision, marks a watershed in the history of Detroit. Once known as the cradle of the U.S. auto industry, the arsenal of democracy and the birthplace of Motown music, Detroit now adds an ignominious new title: largest bankrupt city in U.S. history.

Detroit's emergency manager, Kevyn Orr, in a news conference after the court hearing, said the city will seek to file a plan of readjustment - the city's roadmap toward financial solvency - by early January. He said negotiations are continuing with unions "even now," and called on all parties to bridge gaps in order to conclude Detroit's bankruptcy and move back toward fiscal stability.

In a financial plan he had laid out prior to the bankruptcy filing, Orr had proposed offering unsecured creditors shares in a $2 billion note in exchange for $11 billion in unsecured debt. Orr declined to state on Tuesday whether that remains his plan, and also refused to say how much of a reduction he will seek from secured creditors.

Judge Rhodes, in his ruling that Detroit is eligible, accepted the city's contention that it is broke and that negotiations with its thousands of creditors were infeasible. That was enough to declare Detroit bankrupt under Chapter 9 of the federal bankruptcy code, Rhodes ruled. In a symbolic setback for the city, however, Rhodes found that Orr did not negotiate in good faith with creditors prior to the city's July 18 bankruptcy filing.

"It is indeed a momentous day," Rhodes said as he read aloud for more than an hour from a written statement in a packed courtroom. "We have here a judicial finding that this once-proud and prosperous city cannot pay its debts. It's insolvent. It's eligible for bankruptcy. At the same time it has an opportunity for a fresh start."

Rhodes also said the city could cut pensions as part of the restructuring, ruling against an argument that Michigan's constitution protects them from being slashed. However, Rhodes warned he will not rubber-stamp any pension cuts.

"Nobody should interpret this holding, that pension rights are contract rights, to mean that this court will necessarily confirm any plan of adjustment to impair pensions. It will not casually or lightly exercise the power under federal bankruptcy law to impair pensions," Rhodes said.

His ruling encompassed fine points of law as well as broad observations about Detroit's fiscal health. He stated that his findings were informed by a breakdown in Detroit's public infrastructure and rising crime rate.