THE BLOG
12/03/2013 05:06 pm ET Updated Feb 02, 2014

Detroit Can Declare Bankruptcy

So ruled the judge, paving the way for the largest municipal bankruptcy in our nation's history. Detroit's liabilities are estimated at $18 billion with a 'b.' The next largest city bankruptcy was San Bernardino, CA, in 2012 with a debt level of $46 million...with an 'm.'

Another important part of the judge's ruling was whether state or federal law would prevail regarding whether the city's pension debt ($3.5 billion of the total) could be discharged. Michigan state law says no; federal law says yes.

The judge went federal. Pension holders will try to contest that finding on appeal, but with the caveat that a) I'm no bankruptcy lawyer, and b) a default of this magnitude is unprecedented, I suspect this part of the ruling will stand.

From the beginning, the city looked insolvent, so this strikes me as the correct ruling. It is a necessary part of any plan to give Detroit a chance to consolidate and start with a clean slate, at least in terms of its financial liabilities. But there a lots of ways in which this city and the people in it are a special case, and these things must be considered during the restructuring.

Its poverty rate, 2007-11, was 36 percent, more than twice that of the nation's 14 percent over that period;

Its median family income was about $28K, compared to $53K for the nation.

The average pension for general city workers is under $20K, and remember, some city and state workers do not participate in Social Security. Cops and firefighters get larger pensions, but nothing off the charts (the average for police is $30K).

Given all that, one is glad to read this:

...while the judge said pensions could not be treated differently from other unsecured debt, he said the court would be careful before approving any cuts in monthly payments to retirees. "It will not lightly or casually exercise the power to impair pensions," he said.

Noble sentiments. But it will require close watching to see if they're adhered to.

This post originally appeared at Jared Bernstein's On The Economy blog.