Nathan Bomey, Matt Helms and Joe Guillen

Detroit Free Press staff writers

A federal judge today approved a plan to end Detroit's historic Chapter 9 bankruptcy, giving the Motor City an unprecedented shot at recovering from decades of economic despair and municipal mismanagement that left the city awash in debt and struggling to provide basic public services.

Judge Steven Rhodes ruled that Detroit's comprehensive restructuring plan is fair and feasible, providing the legal authority for the city to slash more than $7 billion in unsecured liabilities and reinvest $1.4 billion over 10 years in public services and blight removal.

BLOG RECAP: Judge Rhodes approves Detroit bankruptcy plan

With Rhodes' decision, the city is expected to cut about 74% of its unsecured debt, freeing up significant cash to reinvest in services. The plan also projects potential cost savings through more efficient government operations that could increase the reinvestment plan to $1.7 billion.

Rhodes called the city's settlement with pensioners a nearly "miraculous" outcome and overruled all objections to the city's plan.

"This city is insolvent and desperately needs to fix its future," Rhodes said.

The judge ruled that the city made the right decision in preserving the Detroit Institute of Arts instead of pursuing a sale of its artwork to resolve debts. And he said the plan of adjustment is fair to all creditors.

The historic ruling puts an end to the largest municipal bankruptcy in U.S. history, with all of the city's major creditors agreeing to support the plan of adjustment. The city is expected to officially emerge from bankruptcy within weeks.

The city's bankruptcy filing on July 18, 2013 brought international attention to the city's plight, shining a spotlight on a ruinous cycle of borrowing and spending that failed to reverse the effects of a stunning economic contraction over the last half century.

"With Judge Rhodes's historic decision, Detroit moves further along the path toward financial stability and success as a viable and attractive place to live, work and invest," Detroit emergency manager Kevyn Orr said in a statement. "My team and I are pleased that Judge Rhodes agrees that the Plan is the best way for the City to resolve its financial difficulties and remain on solid financial footing. This decision would not have been possible without the hard work, compromise and sacrifice of so many people and organizations that put aside their considerable differences and came together for the benefit of Detroit's future."

Orr filed for federal bankruptcy protection on behalf of the city with the approval of Gov. Rick Snyder, a Republican who appointed the former Washington, D.C. lawyer and fellow University of Michigan graduate in March 2013 to repair the city's finances and operations.

To balance the books, Orr almost immediately threatened steep cuts to pensions and retiree health care, insinuated the city might have to sell Detroit Institute of Arts treasures and infuriated Wall Street with a proposal to aggressively slash bonds.

But after Rhodes ruled in December that the city was eligible for bankruptcy and that pensions could be cut, the tone of the city's talks with creditors shifted. The emergence of a deal to reduce pension cuts and preserve the DIA — which the Free Press dubbed the grand bargain — helped soothe the objections of retirees and unions who spent the first half of the case fighting pension cuts by claiming they were protected under the state constitution.

The grand bargain will allow the city to accept $816 million over 20 years from nonprofit foundations, the State of Michigan and DIA donors to reduce pension cuts and save the museum as an independent institution.

"It would not have been possible without the leadership and sacrifice shown by Detroit's hardworking retirees and public sector unions, whose continued commitment to a better Detroit should be honored and acknowledged today," the foundations said in a statement. "Today is a day of determination for Detroit. With Judge Rhodes' confirmation, the city and its residents can focus on the important tasks of rebuilding institutions, repairing communities, reinvigorating the economy and restoring the trust of its citizens."

The DIA, which waged a fierce fight against any potential sale, will not have to sell a single piece of art to pay off the city's debts or reinvest in services.

"This feels like the best thing that could have happened to the DIA," said the museum's elated director Graham Beal.

Rhodes said the DIA's argument that its art could not be sold would "almost certainly prevail" in a long legal battle. But he said the grand bargain is a worthy settlement to avoid a protracted dispute over the art.

"To sell the DIA art would be to forfeit Detroit's future," Rhodes said. "The city made the right decision."

Gov. Rick Snyder, who appointed Orr and personally authorized the bankruptcy, lauded the outcome.

"People will long remember that when Detroit arrived at this troubling hour, its residents and leaders – with supporters statewide – started to pull together as one," Snyder said in a statement. "This day marks the end of the nation's largest municipal bankruptcy, resolved quickly and successfully as a result of cooperation, compromise and a shared vision from many parties. And it offers hope to hundreds of thousands of residents who call Detroit home."

Several major financial creditors, including bond insurers Syncora and Financial Guaranty Insurance Co., argued repeatedly during the case that the grand bargain was illegal because it favored pensioners over other creditors.

But they dropped their objections after reaching settlements in the middle of a 24-day trial featuring 41 witnesses and 2,327 exhibits on the viability of the city's plan of adjustment. Both wound up with cash and city-owned property as part of their settlements.

Rhodes said the settlements with FGIC and Syncora are reasonable and reflect an "ideal model" for municipal restructuring.

All the city's major creditors backed the plan, including the U.S. government-appointed Official Committee of Retirees, the city's two pension funds, two major retiree associations, all of the city's unions and two global banks, UBS and Bank of America Merrill Lynch.

General pensioners will get 4.5% cuts to their monthly checks, the elimination of annual cost-of-living-adjustment (COLA) increases and a clawback in excessive interest from annuity savings. Police and fire pensioners would get a reduction in their COLA increases.

Pensioners voted overwhelmingly to accept the deal during a 60-day balloting process this summer.

The bankruptcy's conclusion also marks the end of Orr's tenure in Detroit. As emergency manager, he retained control of the city's operations for 18 months, but he handed power over to Mayor Mike Duggan and the City Council in September while maintaining control of the bankruptcy case.

But the city will not obtain complete autonomy for at least a decade. The state Legislature and the governor approved a Financial Review Commission — mostly controlled by gubernatorial appointees — to oversee the city's finances. In addition, an investment committee will oversee decisions made by the city's two pension boards.

The board will have the power to veto the city's spending and borrowing decisions, which Orr has described as crucial to giving investors confidence that the city won't slip back into bankruptcy.

Contact Nathan Bomey: 313-223-4743 or nbomey@freepress.com. Follow him on Twitter @NathanBomey. Staff writer Mark Stryker contributed to this report.