Thursday, July 18, 2013

Detroit files largest municipal bankruptcy in U.S. history

The once-mighty Motor City has been in fiscal free-fall as it has seen its population and tax base drop precipitously.

Detroit has become the largest city in US history to file for bankruptcy. State-appointed emergency manager Kevyn Orr on Thursday asked a federal judge permission to place the city into Chapter 9 bankruptcy protection.

By: Monica Davey Mary Williams Walsh The New York Times, 
DETROIT—Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, has filed for bankruptcy, an official said Thursday, the largest U.S. city ever to take such a course.
The decision to turn to the federal courts, which required approval from both the emergency manager assigned to oversee the troubled city and from Michigan Gov. Rick Snyder, is also the largest municipal bankruptcy filing in terms of debt.
Not everyone agrees how much Detroit owes, but Kevyn Orr, the emergency manager who was appointed by Snyder to resolve the city’s financial problems, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.
For Detroit, the filing comes as a painful reminder of a city’s rise and fall. The city 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. Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma it would carry. They anticipate further benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on future borrowing.
But others, including some Detroit business leaders who have seen a rise in private investment downtown despite the city’s larger struggles, said bankruptcy seemed the only choice left — and one that might finally lead to a desperately needed overhaul of city services and a plan to pay off some reduced version of the overwhelming debts. In short, a new start.

The decision to go to court signalled 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 cuts in benefits.
All along, the state’s involvement has carried racial implications, setting off a wave of concerns that the mostly white, Republican-led state government was trying to seize control of Detroit, a Democratic-held city where more than 80 per cent of residents are black.
Detroit’s situation will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities. There have only been about 60 filings under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.
The bankruptcy process could take months, if not years, and is itself expected to be costly and complex.
“It’s not enough to say, let’s reduce debt,” said James Spiotto, an expert in municipal bankruptcy at a Chicago law firm. “At the end of the day, you need a real recovery plan. Otherwise you’re just going to repeat the whole thing over again.”
Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the state constitution that union leaders say bars such cuts.
Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say. But a rush of municipal bankruptcies appears unlikely, said bankruptcy lawyer Karol Denniston.
“If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” Denniston said. “Detroit is going to be a huge test kitchen.”
Around this city, there was widespread uncertainty about what bankruptcy might really mean, now and in the long term.

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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