The soap opera of Detroit’s journey to bankruptcy just turned even more surreal. A state judge has demanded that Michigan governor Rick Snyder withdraw his federal bankruptcy filing of Thursday. The reason: It is unconstitutional (the judge’s reasoning) for the city’s pension obligations to be reduced, as would normally happen in a bankruptcy filing, since that would cause “irreparable damage” to pensioners. Yet of course it is precisely the city’s billions of dollars in debt to underfunded pensions that is at the heart of the problem. Emergency Manager Kevyn Orr, appointed by Snyder in March to take over from the city’s mayor and council, was forced to ask the state for Chapter 9 bankruptcy protection after the city’s creditors refused to accept a restructuing plan that would have included, among other things, a dime-on-the-dollar payout for underfunded pensions.
So now, a state judge says that the pension mess means Detroit can’t file for bankruptcy due to the pensions it can’t pay. Since the city now is under federal jurisdiction, the state judge’s ruling cannot be enforced, but it could carry weight, perhaps with a federal judge who would agree with her ruling. Snyder is contesting the judge’s decision, and a hearing is set for next week. I’ll have more to say on the political meaning of Detroit’s collapse on the homepage soon, but the case will continue to set historical precedent and test legal doctrine at every stage.