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

DETROIT — Detroit filed the largest municipal bankruptcy in the nation's history Thursday, marking a new low in a long decline that has left the U.S. automaking capital bleeding residents and revenue, while rendering city services a mess.

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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

The city, which was the nation's fourth-largest in the 1950s with nearly 2 million inhabitants, has seen its population plummet to 700,000 as residents fled increasing crime and deteriorating basic services, taking their tax dollars with them.

As Detroit faced an estimated debt of $19 billion, the state in March appointed an emergency manager vested with extraordinary powers to rewrite contracts and liquidate some of the city's most valuable assets. That led to once-unthinkable proposals such as forcing public employees to cut their retirement benefits or demanding that investors in municipal bonds -- long considered among the safest investments -- take pennies on the dollars they lent to Detroit. In recent days, both of those groups objected, propelling the city to file for bankruptcy.

In a sign of Detroit's dire fiscal situation, few officials and lawmakers in Michigan or Washington vigorously protested the decision, a far cry from the 1970s when President Gerald Ford intervened with federal loans to prevent New York City from falling into bankruptcy. That there is far less stigma now could encourage other distressed cities and towns to follow Detroit's lead, some analysts worry.

Detroit's deterioration, which started in earnest after the 1967 race riots were among the most violent in the country's history, has accelerated in recent years.

In the 1950s, Detroit, known worldwide as the Motor City, had one of the highest per-capita incomes in the country when auto plants were hiring wholesale. Now it has the highest violent crime rate among the nation's big cities. Average police response times are almost an hour. Nearly 80,000 buildings are abandoned or seriously blighted and 40 percent of the city's streetlights do not work. The jobless rate is above 18 percent, more than twice the national rate.

The abysmal services encouraged more people to flee. The city lost more than a quarter-million residents from 2000 to 2012. Its tax revenue and state aid have plummeted as the auto industry hit hard times, crimping Michigan's finances. Its best-known cultural export, Motown Records, left long ago.

To plug its deficits, the city borrowed huge sums over the years. And the state-appointed emergency manager, Kevyn Orr, a former Washington bankruptcy lawyer, was unable to forge a deal with creditors.

In a letter authorizing the bankruptcy filing, Republican Gov. Rick Snyder said the consequences of laboring under extreme debt would be even worse than bankruptcy.

"I know many will see this as a low point in the city's history," Snyder wrote. "If so, I think it will also be the foundation of the city's future -- a statement I cannot make in confidence absent giving the city a chance for a fresh start, without burdens of debt it cannot hope to fully pay. "

That view is widely shared, as few political leaders pushed for a bailout of the city. After news of the bankruptcy filing, the White House issued a statement saying President Obama is following the situation in Detroit and that he remains "committed to continuing our strong partnership" with the city.

But others warned that bankruptcy would bring pain to the city's 9,500 employees and nearly 20,000 retirees, while plunging the city's financial future into uncertainty.

(Continued on page 2)

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