No longer booming with industry, Detroit files for bankruptcy
DETROIT — Once the very symbol of American industrial might, Detroit became the biggest U.S. city to file for bankruptcy Thursday, its finances ravaged and its neighbourhoods hollowed out by a long, slow decline in population and auto manufacturing.
The filing, which had been feared for months, put the city on an uncertain course that could mean laying off municipal employees, selling off assets, raising fees and scaling back basic services such as trash collection and snow plowing, which have already been slashed.
“Only one feasible path offers a way out,” Gov. Rick Snyder said in a letter approving the move.
Kevin Orr, a bankruptcy expert hired by the state in March to stop Detroit’s fiscal free-fall, made the Chapter 9 filing in federal bankruptcy court.
Michael Sweet, a bankruptcy attorney in Fox-Rothschild’s San Francisco office, said the city would pay current employees. But “beyond that, all bets are off.”
“They don’t have to pay anyone they don’t want to,” Sweet said. “And no one can sue them.”
Detroit lost a quarter-million residents between 2000 and 2010. A population that in the 1950s reached 1.8 million now struggles to stay above 700,000. Much of the middle-class and scores of businesses have fled Detroit, taking their tax dollars with them.
In recent months, the city has relied on state-backed bond money to meet payroll for its 10,000 employees.
Orr was unable to persuade a host of creditors, unions and pension boards to take pennies on the dollar to help facilitate the city’s massive financial restructuring. If the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment.
Snyder determined earlier this year that Detroit was in a financial emergency and without a plan for improvement. He made it the largest U.S. city to fall under state oversight when a state loan board hired Orr.
“The citizens of Detroit need and deserve a clear road out of the cycle of everdecreasing services,” Snyder wrote. “The city’s creditors, as well as its many dedicated public servants, deserve to know what promises the city can and will keep. The only way to do those things is to radically restructure the city and allow it to reinvent itself without the burden of impossible obligations.”
A turnaround specialist, Orr represented automaker Chrysler LLC during its successful restructuring.
He laid out his plans in June meetings with debt holders, in which his team warned there was a 50-50 chance of a bankruptcy filing. Some creditors were asked to take about 10 cents on the dollar of what the city owed them.
Orr’s team of financial experts said that proposal was Detroit’s one shot to permanently fix its fiscal problems. The team said Detroit was defaulting on about $2.5 billion in unsecured debt to “conserve cash” for police, fire and other services.
Detroit’s budget deficit is believed to be more than $380 million. Orr has said long-term debt was more than $14 billion and could be between $17 billion and $20 billion.
Some are concerned that a bankrupt Detroit will cause businesses large and small to reconsider their operations in the city. But General Motors, which filed and emerged from a Chapter 11 bankruptcy, does not anticipate any impact to its daily operations.
“GM is proud to call Detroit home and today’s bankruptcy declaration is a day that we and others hoped would not come,” the automaker said in a statement.
Detroit has more than double the population of the California community of Stockton, which had been the largest U.S. city ever to file for bankruptcy when it did so in June 2012.