Judge approves Detroit bankruptcy exit plan

Judge approves Detroit's bankruptcy exit plan
Judge approves Detroit's bankruptcy exit plan   

A U.S. Court judge on Friday confirmed Detroit's plan to adjust $18 billion of debt and exit the biggest-ever municipal bankruptcy.

The ruling by Judge Steven Rhodes, who is overseeing the historic case, came more than two months after the start of a hearing to determine whether the plan was fair to creditors and feasible for the city to implement. Rhodes—who remarked that society holds dear the value of fresh starts and second chances—said the plan to exit bankruptcy is reasonable, although there were appeals from pensioners.

The judge said it is a "vast understatement" to call the pension agreement reasonable, adding that it "borders on miraculous." He later suggested that the unions who opposed the deal consider the longer view that revitalizing the city will help members more than protecting current pensions will.

"Today we secured a brighter future for Detroit's tomorrows and for Michigan's tomorrows," Michigan Attorney General Bill Schuette said in a statement, adding that "Detroit and Michigan are stronger and safer."

Cars drive down Grand River Avenue in Detroit with the city's skyline in the background.
Jeff Kowalsky | Bloomberg | Getty Images
Cars drive down Grand River Avenue in Detroit with the city's skyline in the background.

Emergency manager Kevyn Orr, who took Detroit into bankruptcy, says the city will be on a "little bit of a diet for a while."

Detroit is cutting the pensions of general retirees by 4.5 percent, erasing $7 billion of debt and promising to spend $1.7 billion to demolish scores of dead buildings, improve public safety and upgrade basic services, among other key steps.

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The case concluded in just under 16 months, lightning speed by bankruptcy standards. The success was largely due to a series of deals between Detroit and major creditors, especially retirees who agreed to accept smaller pension checks after the judge said they had no protection under the Michigan Constitution.

No significant critics were left by early October. Bond insurers with more than $1 billion at stake repeatedly argued for the sale of valuable art but dropped that plea and settled for much less.

In response to the ruling, General Motors released a statement saying "Judge Rhodes' decision is historic and a validation for everyone who has been committed to Detroit. Working together, we can transform the city and you can see clear progress in the restoration of downtown, the entrepreneurs who are flocking here, the massive building projects getting underway and the work being done to improve education, neighborhoods and city services."

It took more than two years for a smaller city, Stockton, California, to get out of bankruptcy. San Bernardino, a California city smaller than Stockton, still is operating under Chapter 9 protection more than two years after filing.

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Rhodes had to accept Detroit's remedy or reject it in full, not pick pieces. His appointed expert, Martha "Marti" Kopacz of Boston, said it was "skinny" but "feasible," and she linked any future success to the skills of Mayor Mike Duggan and the city council and a badly needed overhaul of technology at city hall.

"The hard work really starts now," Maglan Capital President David Tawil told Reuters. "This was a piece of work, the financial compromise. But now the city needs to be seriously reinvigorated so that it doesn't find itself in a similar situation a number of years from now."

Jeff Kowalsky | Bloomberg | Getty Images

The most unusual feature of the plan is an $816 million pot of money funded by the state, foundations, philanthropists and The Detroit Institute of Arts. The money will patch holes in Detroit's pension funds, prevent even deeper cuts to retirees and avert the sale of city-owned art at the world-class museum.

Michigan Gov. Rick Snyder appointed Kevyn Orr as emergency manager in March 2013, giving him extraordinary authority to fix the city's finances.

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With more square miles (kilometers) than Manhattan, Boston and San Francisco combined, Detroit didn't have enough tax revenue to reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat.

The city has a population of 688,000, down nearly 30 percent from 2000 and an even longer descent from 1.2 million in 1980.

Duggan, in office less than a year, is the fourth mayor since 2008 when Kwame Kilpatrick resigned in scandal. A dreadful debt deal under Kilpatrick that locked Detroit into a high interest rate when rates were falling during the recession contributed to the bankruptcy.

—Reuters and The Associated Press contributed to this report. CNBC's Everett Rosenfeld, Betsy Cline and Scott Cohn also contributed reporting.