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Detroit’s Bankruptcy Obstacles
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Detroit is headed towards a July trial in which the city will decide how to reorganize its $18 billion debt and end the biggest municipal bankruptcy in U.S. history declared by U.S. judge Stephen Rhodes. Citing that its negotiations with its thousands of creditors were infeasible, the state governor declared a financial emergency and appointed an emergency manager, Kevyn Orr.

  
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The legal issues surrounding Detroit’s bankruptcy filing are a mess. Detroit’s bankruptcy could potentially force thousands of retirees into abject poverty. Detroit city manager Kevyn Orr, an appointee of Gov. Rick Snyder, hopes to use the bankruptcy to cut Detroit’s $11.5 billion debt down to just $2 billion potentially cutting an average retiree’s pension benefits by 83 percent in the process. Pensioners are at risk because of a hole in federal law — the federal Pension Benefit Guaranty Corporation provides a minimal level of benefits to retirees when a private business goes bankrupt, but it provides no such security to the pensioners in the public sector.

The most obvious obstacle to this bankruptcy is a state judge’s decision last Friday declaring it unconstitutional under the Michigan state constitution. That constitution provides that “the accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” The extent that Detroit’s bankruptcy filing seeks to diminish already-accrued pension benefits, the filing itself may be unlawful. The state judge’s ruling ordering the bankruptcy filing withdrawn is already on appeal.

The state-appointed manager, Kevyn Orr, said according to Reuters that, “We hope to have the hearing completed by the middle of August or so,” reporting from the Manhattan Institute.   According to Bloomberg News, the city filed its spending plan in U.S. Bankruptcy Court in Detroit. Creditors are also asking U.S. Bankruptcy Judge Steven Rhodes to postpone the consideration of a separate plan to end interest-rate swaps that have cost taxpayers around $200 million. The swap agreements are agreements that Detroit entered into with banks to hedge against interest rate risk.

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Detroit also has serious problems with crime. The city reportedly has the sixth highest total rate of violent crime and the highest per capita rate of violent crime among the 25 largest U.S. cities. According to Forbes Magazine, Detroit was the most dangerous city in the United States in 2012 for the fourth year. In 2013 there were 333 murders reported in Detroit. Forbes Magazine did not include cities with a population below 200,000 people in their list.

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