United States Federal Bankruptcy Judge Stephen Rhodes has ruled that the city of Detroit meets all criteria to enter into Chapter 9 bankruptcy protection. This is a standard first step in any bankruptcy case, used to determine if the entity filing the bankruptcy petition with the court should be in bankruptcy protection. If an individual was to personally file for chapter 11 bankruptcy protection, the situation would proceed in much the same way.

The ruling stated that the city is financially insolvent, unable to create a roadmap for paying off the estimated $18 billion in debt with existing revenue streams. Rhodes agreed with Orr that the city had attempted to negotiate in good faith with creditors. Detroit Emergency Manager Kevyn Orr had made attempts to reach out to creditors and give them tours of the city in order to show them the dire situation of dilapidated infrastructure and crumbling housing stock. The idea was that the creditors would take settlements of pennies on the dollar owed after seeing the shape the city was in. Creditors however, were not interested. With over 1,000 creditors requiring agreements to be reached, it simply could not materialize.

Rhodes also ruled that the challenges to Detroit’s Emergency Manager law were moot and that the authority of the Emergency Manager allowed for the city to enter into bankruptcy without approval of the mayor or city council.

Orr said of the ruling in a statement:

“We are pleased with Judge Rhodes’ decision today, and we will continue to press ahead with the ongoing revitalization of Detroit. We look forward to working with all our creditors – pension funds, unions and lenders – to achieve a consensual agreement on a restructuring plan that balances their financial recoveries with the very real needs of the 700,000 citizens of Detroit.”

Many remain concerned over the future of both city assets (particularly the Detroit Institute of Arts) and the pensions of city employees, which Rhodes ruled today were not protected by the Michigan State Constitution. While pensioners await their fate, citizens wonder if there will be a fire-sale of non-essential assets in order to pay off creditors. It is expected that we will have a better idea of what will become of Detroit’s assets by 2014, when Kevyn Orr and Mayor Dave Bing’s administration unveil a debt reduction plan while under bankruptcy protection.

This will have larger implications outside of Detroit, as the ruling that private pensions are, according to Rhodes, “not entitled to any heightened protection in bankruptcy.” This essentially means that as far as federal court is concerned, pension debt is no different than any other form of debt liability. While Detroit is the biggest US city to file for bankruptcy, it certainly is not the first. With employee pensions no longer immune to insolvency, this could have implications from Camden New Jersey to Vallejo California.

We can only hope that these initial and painful steps will pave the way for a better Detroit in the future.

An appeal was filed almost immediately by the American Federation of State, County and Municipal Employees Union.

Update: Dec 3, 2013 at 2:56pm

In a statement today, Detroit’s Emergency Manager Kevyn Orr says that the artworks in the Detroit Institute of Arts is valued at less than $2 billion. Selling or leasing the art, while still on the table, will not solve the city’s financial obligations including a $3.5 billion pension shortfall.