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Detroit bankruptcy moves forward as judge rules city can shed debt

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Dec. 2, 2013: Shown in the background is downtown Detroit.AP

Detroit's historic bankruptcy will move forward after a judge ruled Tuesday that the financially crumbling city is eligible to shed billions in debt. 

Judge Steven Rhodes turned down objections from unions, pension funds and retirees, which all stand to lose big under any plan to address Detroit's long-term liabilities. 

The decision Tuesday was long-awaited, and clears the way for the city to proceed in the largest public bankruptcy in U.S. history. 

"This once proud and prosperous city can't pay its debts. It's insolvent. It's eligible for bankruptcy," Rhodes said in announcing his decision. "At the same time, it also has an opportunity for a fresh start." 

The plan isn't on the judge's desk yet. The issue for Rhodes, who presided over a nine-day trial, was whether Detroit met specific conditions under federal law to stay in bankruptcy court and turn its finances around after years of mismanagement, chronic population loss and collapse of the middle class. 

The city has argued that it needs bankruptcy protection for the sake of beleaguered residents suffering from poor services such as slow to nonexistent police response, darkened streetlights and erratic garbage pickup -- a concern mentioned by the judge during the trial. 

Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city. 

"The status quo is unacceptable," emergency manager Kevyn Orr testified. 

Rhodes said Tuesday that Detroit has a proud history but no longer has the resources to provide critical services, the judge said, adding: "The city needs help." 

Rhodes' decision is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in the Michigan Constitution protecting public pensions isn't a bulletproof shield in a bankruptcy. 

The city says pension funds are short by $3.5 billion. Anxious retirees drawing less than $20,000 a year have appeared in court and put an anguished face on the case. Despite his finding, Rhodes cautioned everyone that he won't automatically approve pension cuts that could be part of Detroit's eventual plan to get out of bankruptcy. 

There are other wrinkles. Art possibly worth billions at the Detroit Institute of Arts could be part of a solution for creditors, as well as the sale of a water department that serves much of southeastern Michigan. Orr offered just pennies on every dollar owed during meetings with creditors before bankruptcy. 

Behind closed doors, mediators, led by another judge, have been meeting with Orr's team and creditors for weeks to explore possible settlements. 

Much of the trial, which ended Nov. 8, focused on whether Orr's team had "good-faith" negotiations with creditors before the filing, a key step for a local government to be eligible for Chapter 9. Orr said four weeks were plenty, but unions and pension funds said there never were serious across-the-table talks. 

"The governor took more time to interview the consultants to help the city with restructuring than they took to negotiate the restructuring itself. That's absurd," attorney Sharon Levine, representing AFSCME, said at trial.

City truck mechanic Mark Clark, 53, said he may look for another job after absorbing pay cuts and higher health care costs. Now a smaller pension looms.

"Most of us didn't have too much faith in the court. ... The working class is becoming the have-nots," Clark said outside the courthouse. "I'm broke up and beat up. I'm going to pray a whole lot."

Marcia Ingram, a retired clerical worker, said she may need to find work but added: "How many folks are going to hire a 60-year-old woman?"

An appeal of Rhodes' decision is a certainty. Opponents want to go directly to a federal appeals court in Cincinnati, bypassing the usual procedure of having a U.S. District Court judge hear the case. 

Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. But by July, Orr and Gov. Rick Snyder decided bankruptcy was Detroit's best option. 

Detroit, a manufacturing hub that offered good-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million since then. Tax revenue in a city that is larger in square miles than Manhattan, Boston and San Francisco combined can't reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat. 

Donors have written checks for new police cars and ambulances. A new agency has been created to revive tens of thousands of streetlights that are dim or simply broken after years of vandalism and mismanagement. 

While downtown and Midtown are experiencing a rebirth, even apartments with few vacancies, many traditional neighborhoods are scarred with blight and burned-out bungalows. 

The Associated Press contributed to this report.