Update: The Detroit Free Press reports on Judge Rhodes’s decision to allow Detroit’s Chapter 9 bankruptcy to proceed. His statement signals that he will not allow deep pension cuts but also hinted that windfall sales of art would not solve the city’s problems:

The city will now proceed with its plan to introduce a proposal to restructure its debt and reshape government operations. Lawyers for Jones Day, the law firm that represents the city in bankruptcy court, expect to file the first version of the so-called “plan of adjustment” by the end of the year.

The plan is expected to include controversial cuts to unsecured creditors and asset sales, including a potential spinoff of the water and sewer department and the possible sale of Detroit Institute of Arts property.

Judge rules Detroit eligible for historic Chapter 9 bankruptcy; says pensions can be cut  (Detroit Free Press )

The next chapter in the saga of Detroit, it’s municipal collapse and the battle between city workers, tax payers and the surrounding political entities will begin today when Judge Steven Rhodes rules on the city’s eligibility for bankruptcy:

Many legal specialists and government officials say they expect Detroit will be found eligible for bankruptcy protection. Under the provisions of municipal bankruptcy, a city must be deemed insolvent, a standard that many bankruptcy specialists say Detroit, which is buried beneath $18 billion in debts, is likely to meet. In fact, Detroit’s filing marks the nation’s largest municipal bankruptcy ever in terms of the size of the debt.

But a city must also show that it has negotiated in “good faith” with its creditors or is unable to negotiate with them because such talks are impracticable. Some public sector unions and retirees, who object to the possibility that their pensions may be cut, say Detroit’s leaders never made an earnest effort to bargain, but rather intended to seek bankruptcy all along. Outside bankruptcy, the Michigan Constitution prohibits reducing pensions that public workers have already earned.

Whatever Judge Rhodes rules, the legal battles will be far from over. Any decision is likely to bring a number of appeals. If Detroit is found ineligible for bankruptcy protection, the city, which has already begun defaulting on some debt, is also likely to find a barrage of demands and lawsuits from its creditors.

Detroit Braces for Bankruptcy Ruling (NYTimes)