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Detroit files for bankruptcy
July 21, 2013, 12:06 pm
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The city of Detroit filed for Chapter 9 bankruptcy protection in federal court Thursday, laying the groundwork for a historic effort to bail out a city that is sinking under billions of dollars in debt and decades of mismanagement, population flight and loss of tax revenue.

The bankruptcy filing makes Detroit the largest city in U.S. history to do so and also the largest municipal bankruptcy filing in US history in terms of debt. "This is a difficult step, but the only viable option to address a problem that has been six decades in the making," said Governer Rick Snyder, who authorized the move after a recommendation from the emergency financial manager, Kevyn D. Orr, he had appointed to resolve Detroit's dire financial situation.

Not everyone agrees how much Detroit owes, the amount could range from $18 to 20 billion. Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

From here, there is no road map for Detroit's recovery, not least of all because municipal bankruptcies are rare. State officials said ordinary city business would carry on as before, even as city leaders take their case to a judge, first to prove that the city is so financially troubled as to be eligible for bankruptcy, and later to argue that Detroit's creditors and representatives of city workers and municipal retirees ought to settle for less than they once expected.

The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept c uts i n b enefits. T he n ature of Detroit's situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid- 1950s. The debt in Detroit dwarfs that of Jefferson County, Ala., which had been the nation's largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt.

Detroit's struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County's downfall. Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city's operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.

For some Detroiters, recent memories of bankruptcies by Chrysler and General Motors - and the reemergence of those companies - appeared to have calmed nerves. But experts say corporate bankruptcy procedures are significantly different from municipal bankruptcies. In municipal bankruptcies, for instance, the ability of judges to intervene in how a city is run is sharply limited. And municipal bankruptcies are a form of debt adjustment, as opposed to liquidation or reorganization. Orr has said that as part of any restructuring he wants to spend about $1.25 billion on improving city infrastructure and services. But a major concern for Detroit residents remains the possibility that services, already severely lacking, might be further diminished in bankruptcy. 

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