A Michigan court judge has challenged Detroit's bankruptcy filing, saying it contravenes the state's constitution.

The ruling by Circuit Judge Rosemarie Aquilina in the Michigan capital of Lansing orders Detroit Emergency Manager Kevyn Orr to withdraw the bankruptcy petition, and says the state governor lacks the power to "diminish or impair pension benefits," a key demand on Detroit city unions as the city works out its financial problems.

The move comes Friday, after city officials sought to reassure concerned citizens, saying the move will be the best thing for the city in the long run.

At a press event, Gov. Rick Snyder and Emergency Manager Kevyn Orr told assembled media that the move to enter bankruptcy proceedings late Thursday will give the city options down the line.

"I didn't view this as a terrible answer, because it presents options," Snyder said. "Now is the opportunity to stop 60 years of decline. Did anybody like the Detroit of five years ago, 10 years ago?"

Snyder said the drastic move will give the city a chance to deal with its systemic funding problems. "People have not stopped … kicking the can down the street'," he said.

Percent change in Detroit population by neighbourhood 2000 - 2010



Sources: U.S. Census, Southeast Michigan Council of Governments, City of Detroit, (Google/CBC)

The city has entered into what's known as a Chapter 9, filing, based on the section of the U.S. Bankruptcy Code that applies. Individuals and companies are better known for so-called Chapter 11 proceedings, whereas Chapter 9 is the section that allows municipalities to restructure their debts, as long as they have the permission of the state government above them.

Friday's court ruling may slow proceedings, as it challenges the power of both the state and the city to restructure under Chapter 9 protection.

Orr proposed a deal in June in which creditors, including two pension funds representing city workers, would accept 10 cents for every dollar they were owed.

Detroit is already facing a number of lawsuits over this proposal and Aquilina’s ruling that the Michigan constitution prohibits actions that will lessen the pension benefits of public employees related to those suits.

Although the move has been on the table for months, as Detroit has struggled to get back to financial health for years. Municipal worker layoffs, service cutbacks and asset sales could be in the offing.

The city is even thinking about selling off its valuable art collection, including works by Picasso, van Gogh and Bruegel, to raise funds. There's also talk of selling venues such as the Detroit Zoo, or historic Fort Wayne, a tourist site in the city.

"Services will remain open, paycheques will be made, bills will be paid," Orr said.

Slow decline

With $18 billion in outstanding debts, few cities have felt the demise of America's manufacturing sector as acutely as Detroit. With a population of close to two million in the 1950s, the city now has about a three quarters of a million residents. The population has declined by 25 per cent in the last decade alone.

Windsor reaches out

Windsor, Ont., the Canadian city across the river from Detroit, has had a close relationship with the Motor City and is concerned about the tunnel connecting the two cities.

Windsor Mayor Eddie Francis says his office has reached out to the office of Detroit's emergency manager to ask what will happen with the tunnel that runs beneath the Detroit River.

The U.S. section of tunnel is owned by the City of Detroit and leased to a private corporation.

Francis says he would prefer the tunnel stay in public hands, but if it is to be sold, Windsor will have to consider its options.

Detroit had the highest per-capita income of major American cities in 1960, but today has an unemployment rate of 18 per cent — more than twice the national average.

The city has more than 100,000 different creditors, its two largest being underfunded pension plans for city workers, and one for police and fire services. Those two plans are owed $2 billion US and $1.4 billion, respectively.

Orr was unable to convince the city's many creditors to accept less than full value for their debt, so the city entered bankruptcy proceedings as a last resort. Orr pitched the process as a viable option for all sides, and he hopes it will be completed within about 12 months.

Detroit has more than double the population of the Northern California community of Stockton, Calif., which until Detroit had been the largest U.S. city ever to file for bankruptcy when it did so in June 2012.

Before Detroit, the largest municipal bankruptcy filing had involved Jefferson County, Ala., which was more than $4 billion in debt when it filed in 2011. Another recent city to have filed for bankruptcy was San Bernardino, Calif., which took that route in August 2012 after learning it had a $46 million deficit.

With files from Reuters