July 18, 2013

Detroit files for largest municipal bankruptcy in history

The decision comes after a long economic slide, and the strategy may be a model for other cities in deep distress.

The Washington Post

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Detroit on Thursday became the largest city in U.S. history to file for bankruptcy when state-appointed emergency manager Kevyn Orr asked a federal judge for municipal bankruptcy protection.

The Associated Press

"A bankruptcy might be good in terms of wiping out the debt," said Coleman Young II, a state senator and son of a former mayor of Detroit who served for 19 years. "But in terms of the human impact, retirees who could have their pensions gutted, citizens who will lose services. . . . It is going to be painful."

The filing begins a one- to three-month process to determine whether the city is eligible for Chapter 9 protection and determine who may compete for the limited settlement money that Detroit has to offer. But it could be years before the city emerges from bankruptcy.

Orr has talked about spinning off city assets, including beloved Belle Isle park and Coleman Young International Airport, as ways to raise money. Also, some have talked about the city auctioning off some of the valuable works at the Detroit Institute of Arts. But Orr has reportedly said he is not selling the art, much of which is protected by private covenants, city agreements and state laws.

It is unclear whether those barriers will stand in a municipal bankruptcy, where a federal judge has no power to force asset sales, but can refuse to approve a debt settlement plan that is not to his liking.

Earlier this week, the city's two pension funds filed suit seeking to block a bankruptcy, an action that Orr's office said indicated that negotiations outside of bankruptcy court were fruitless.

The city's bankruptcy petition far surpasses the $4.2 billion filing by Jefferson County, Ala. in 2011, which previously was the largest in the nation. That county, which includes Birmingham, is on track to emerge from court protection by the end of the year, with many bondholders forgoing interest payments, and others unable to recover even the amount of money they loaned to the county.

In all, Jefferson County's bankruptcy plan cut $1.2 billion in principal payments to investors who held bonds in a defaulted sewer project, according to Bloomberg.

Many observers see that outcome as a hopeful sign for Detroit, which they say needs to shed its debt to have an opportunity to recapture any part of its past glory.

Daniel Miller, the city comptroller in fiscally pressed Harrisburg, Pa., said that Detroit's move could prove to be a model for other distressed cities across the country.

"I like what is happening in Detroit very much," Miller said, noting that Harrisburg is not in bankruptcy but is struggling in state receivership. "People say that if a city files for bankruptcy it cannot borrow again. That is all just ridiculous talk. Guess what? In Harrisburg, we can't get access to capital markets right now."

Orr has said he wants to use bankruptcy to erase many of Detroit's debts and then invest $1.25 billion in upgrading the city services and infrastructure in hopes of putting the city on a path to lasting recovery.

A former mayor suggested the city could take a cue from two of its own automakers, which were bailed out by the federal government, brought through bankruptcy and are now thriving -- a fact that Obama frequently boasted of during his re-election campaign.

This time, there are few signs of help from Washington. But former Mayor Dennis W. Archer said Detroit could still seem the same kind of recovery.

"Once the city gets through this it will be well on its way to substantial revitalization," said Archer. "The stigma of bankruptcy has not prevented corporations from going on to be successful. Witness Chrysler and General Motors. The same could be said of the City of Detroit. If this works, other distressed cities will be knocking on our door and asking, 'How did you do that?"'

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