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December 4, 2013

Judge: Detroit eligible for Chapter 9 bankruptcy

DETROIT (AP) — A judge ruled Tuesday that Detroit is eligible to shed billions of dollars of its long-running debt, including the pensions of thousands of workers and retirees, in a much-anticipated decision that shifts the city's epic bankruptcy case into a new and delicate phase.

Judge Steven Rhodes, who wondered aloud why the bankruptcy had not happened years ago, said pensions can be cut just like any contract because the Michigan Constitution does not offer bulletproof protection for employee benefits. But he signaled a desire for a measured approach and warned city officials that they must be prepared to defend any deep reductions.

"This once proud and prosperous city can't pay its debts. It's insolvent," Rhodes said in announcing that Detroit was formally eligible for the largest public bankruptcy in U.S. history. "At the same time, it also has an opportunity for a fresh start."

The ruling came more than four months after Detroit filed for Chapter 9 protection.

Rhodes agreed with unions and pension funds that the city's emergency manager, Kevyn Orr, did not negotiate in good faith in the weeks ahead of the July filing, a key condition under federal law. But he said the number of creditors — more than 100,000 — and a wide array of competing interests probably made that "impossible."

Detroit "could have and should have filed for bankruptcy long before it did. Perhaps years," the judge said.

The decision set the stage for officials to confront $18 billion in debt with a plan that might pay creditors just pennies on the dollar and is sure to include touchy negotiations over the pensions of about 23,000 retirees and 9,000 workers. Orr says pension funds are short by $3.5 billion.

Rhodes promised that he would not "lightly or casually" sign off on just any cuts.

The city has argued it needs bankruptcy protection for the sake of beleaguered residents who have for years tolerated slow police responses, darkened streetlights and erratic garbage pickup — a concern mentioned by the judge during a nine-day trial that ended Nov. 8.

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