Detroit Files For Bankruptcy—With Fingers Crossed
The city of Detroit has filed for bankruptcy, the largest such filing in American history. Doing so only addresses one of the city's problems, though, suggesting that it has almost certainly not hit rock bottom.
The city of Detroit has filed for Chapter 9 bankruptcy, according to the Associated Press, completing the city's long, slow economic slide and marking the largest municipal bankruptcy in history. Doing so only addresses one of the city's problems, though, suggesting that it has almost certainly not hit rock bottom.
According to the Free Press, the city owes $18.5 billion to creditors, including its public employee pensions. If you're curious (as we were), what would happen if each of the city's 701,475 residents took their $13,965 annual per capita income (!) and gave it to the city to retire that debt, the answer is that it would still take two years before it was retired.
Which is precisely the problem. From a peak population of 1.8 million in the 1950 Census, the city emptied. To oversimplify, the people left in concert with (though not only because of) the decline of the manufacturing industry, including automobiles. With that industry went higher-paying jobs. For the city, fewer people meant fewer collected taxes. Meanwhile, the population aged. City workers moved into retirement, expecting that the pensions that were part of their contracts would help provide for them. Less in taxes, more in obligations, a smaller, poorer tax base. Again: oversimplified. But in summary, this is Detroit.
In March, Michigan Gov. Rick Snyder appointed Kevyn Orr as the city's emergency manager—an unelected position essentially granted autocratic power to make changes as Orr sees fit. (The law allowing emergency managers was itself highly controversial.) Today, Snyder signed off on the filing, as he explains in the video at right, via BuzzFeed News. "Let me be blunt," Snyder said. "Detroit's broke."
Just yesterday, Orr was profiled by the Wall Street Journal.
Mr. Orr, who is paid $275,000 a year, has hired a new police chief and chief financial officer. The city is in the midst of privatizing its garbage collection and outsourcing its publicly run electric department for street lighting. Mr. Orr is contemplating leasing the city's island park and its regional water and sewer system. He is also weighing a takeover of at least one of the city's pension funds, which are under investigation by the city's auditor general for possible mismanagement.
Fittingly, Orr, a corporate bankruptcy expert, worked with Chrysler when it went through the process.
Since 2010, seven cities, counties, and towns have declared bankruptcy under Chapter 9. About 500 petitions for bankruptcy have been filed in the law's history.
Even with its population decline, Detroit is the largest city to declare bankruptcy, by far. The city now begins a multi-month process in which it works with a court to determine how the city's limited money would be divvied up among those it owes. (A bit of a bright side: The city's bond rating can't drop much.) The Free-Press walks through what happens next.
- A bankruptcy judge is appointed and a bankruptcy court (Detroit, Kentucky, Ohio, or Tennessee) is selected.
- A stay is issued on the city's bills and any lawsuits against the city.
- The city proves that it is insolvent, while creditors try to challenge the city's attempts to file under Chapter 9.
- If the judge approves the filing, the city starts restructuring its debts. The entire thing could take years.
That stay on lawsuits may involve some tricky timing, as the newspaper explains.
The employee groups, and separately the city’s two pension funds in another lawsuit, argue that the governor—who under Michigan law must authorize any bankruptcy filing—cannot do so if the filings include plans to reduce pension benefits, because the state’s constitution explicitly protects public pensions.
The groups had planned to go to court on Monday to block a bankruptcy declaration—which they suspect is why Orr filed before that point in time.
Detroit's bankruptcy filing only fixes one of the city's long-term problems, of course, the cycle of borrowing and spending that left the city unable to pay its bills. The population won't suddenly rebound. The 60 percent of kids living in poverty won't be thrust into the middle class. Republican elected officials won't stop using it as a punchline.
Orr doesn't intend that the action will be a cure-all. He just wants to halt the slide.