Welcome to Bankruptcy, Detroit!

As of 11:30 a.m. Eastern time
today, Federal Judge Steven W. Rhodes made official what has been
obvious for a long time: Detroit is bankrupt. After a lengthy
hearing this morning detailing the many, many ways Detroit is an
utterly failed city, Rhodes gave the city permission to seek
bankruptcy protection. From the Detroit
Free Press:

The city of Detroit today officially became the largest
municipality in U.S. history to enter Chapter 9 bankruptcy after
U.S. Bankruptcy Judge Steven Rhodes declared it met the specific
legal criteria required to receive protection from its
creditors.

The landmark ruling ends more than four months of uncertainty
over the fate of the case and sets the stage for a fierce clash
over how to slash an estimated $18 billion in debt and long-term
liabilities that have hampered Detroit from attacking pervasive
blight and violent crime.

Rhodes — in a surprise decision this morning — also said he’ll
allow pension cuts in Detroit’s bankruptcy. Rhodes emphasized that
he won’t necessarily agree to pension cuts in the city’s final
reorganization plan unless the entire plan is fair and
equitable.

“Resolving this issue now will likely expedite the resolution of
this bankruptcy case,” he said.

Rhodes’ comments on pension cuts may well prove to be extremely
important not just for Detroit, but for any city currently in
bankruptcy or considering bankruptcy. Chad Livengood of The
Detroit News tweeted quotes from the
judge as he delivered the ruling. The judge said that pensions are
no different from other contracts under federal bankruptcy laws and
“not entitled to any heightened protection in bankruptcy.”

That’s a big deal. Pension protectors have been trying to argue
that public employee pension benefits can’t be cut back and are
protected by state laws or within state constitutions. Federal
bankruptcy courts don’t have to care. Cities like Stockton and
Vallejo, Calif., have resisted trying to change their pension plans
even while in bankruptcy. Maybe this ruling will give city leaders
the political courage to address one of their biggest sources of
budget debt.

The American Federation of State, County and Municipal Employees
have already filed notice that they plan to appeal.

Reason’s Shikha Dalmia highlighted Detroit’s terrible economic
state and how it got there in our November Reason magazine
feature, “How to Break an American City.”
Read it here, along with tales of other failing cities, like
San Bernardino, Calif., Harrisburg, Pa., Trenton, N.J., and
Chicago.

Below: ReasonTV reports how Detroit’s oppressive regulatory
structure
drives out small businesses: