Detroit is Bankrupt

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Yesterday, Detroit became the largest city in US history to file for Chapter 9 bankruptcy. Truly a sad step in the continuing decline of what was one of the largest, most prosperous cities in America in the middle part of the last century.

The (fiscally) deadly combination of the decline of the American auto industry coupled with a lack of economic diversification in the city started the slow decline, even in the 1950’s. But that change is something, perhaps, the city could have pivoted away from by finding new ways to keep people working and living in Detroit. That economic change precipitated a demographic one; much more difficult to combat and unprecedented for such a large metropolitan area.

In 1950 there were 1.85 million people in Detroit. In 1970, it was 1.5 million. In 1990, it was a million flat. By 2010, it was down to 710,000. When your city is shrinking like that, you end up with a tax base that’s inadequate to maintain the fixed infrastructure or to pay off pension costs that were incurred in more prosperous times.

Dwindling tax bases threaten many Rust Belt cities, and cities all across the country, facing truly difficult decisions about how to continue doing the business of governing when economic crises globally, nationally, and locally have put them in the red. Huge shifts in industry and population create a downward economic spiral many municipalities are not swift enough to combat. Figuring out the tools to best combat these changes (targeted tax breaks? Green development? De-development?) is the great public policy challenge of this generation and a huge part of the public policy and urban policy fields’ focus for aspiring public sector leaders.

For a timeline of Detroit’s decline and related municipal bankruptcies in the US, see the breakdown from the Associated Press:

At the height of its industrial power, Detroit was an irrepressible engine of the American economy, offering well-paying jobs, a gateway to the middle class for generations of autoworkers and affordable vehicles that put the world on wheels.

But by Thursday, the once-mighty symbol of the nation’s manufacturing strength had fallen into financial ruin, becoming the biggest U.S. city ever to file for bankruptcy – the result of a long, slow decline in population and auto manufacturing.

Although the filing had been feared for months, the path that lay ahead was still uncertain. Bankruptcy could mean laying off employees, selling off assets, raising fees and scaling back basic services such as trash collection and snow plowing, which have already been slashed.

Kevin Frederick, an admissions representative for a local career training school, called the step “an embarrassment.”

“I guess we have to take a couple of steps backward to move forward,” Frederick said.

Now city and state leaders must confront the challenge of rebuilding Detroit’s broken budget in as little as a year.

Kevyn Orr, a bankruptcy expert hired by the state in March to stop Detroit’s fiscal free-fall, said Detroit would continue to pay its bills and employees.

But, said Michael Sweet, a bankruptcy attorney in Fox-Rothschild’s San Francisco office, “they don’t have to pay anyone they don’t want to. And no one can sue them.”

The city’s woes have piled up for generations. In the 1950s, its population grew to 1.8 million people, many of whom were lured by plentiful, well-paying auto jobs. Later that decade, Detroit began to decline as developers started building suburbs that lured away workers and businesses.

Then beginning in the late 1960s, auto companies began opening plants in other cities. Property values and tax revenue fell, and police couldn’t control crime. In later years, the rise of autos imported from Japan started to cut the size of the U.S. auto industry.

By the time the auto industry melted down in 2009, only a few factories from GM and Chrysler were left. GM is the only one with headquarters in Detroit, though it has huge research and testing centers with thousands of jobs outside the city.

Detroit lost a quarter-million residents between 2000 and 2010. Today, the population struggles to stay above 700,000.

The result is a metropolis where whole neighborhoods are practically deserted and basic services cut off in places. Looming over the crumbling landscape is a budget deficit believed to be more than $380 million and long-term debt that could be as much as $20 billion.

In recent months, the city has relied on state-backed bond money to meet payroll for its 10,000 employees.

Orr made the filing in federal bankruptcy court under Chapter 9, the bankruptcy system for cities and counties.

He was unable to persuade a host of creditors, unions and pension boards to take pennies on the dollar to help with the city’s massive financial restructuring. If the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment.

Orr said Thursday that he “bent over backward” to work with creditors, rejecting criticism that he was too rigid. “Anybody who takes that position just hasn’t been listening.”

The bankruptcy could last through summer or fall 2014, which coincides with the end of Orr’s 18-month appointment, he said.

Gov. Rick Snyder, who called bankruptcy the “one feasible path,” 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.

Creditors and public servants “deserve to know what promises the city can and will keep,” Snyder wrote in a letter that was part of the filing. “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 issued a warning early on in his tenure in Detroit that bankruptcy was a road he preferred to avoid.

Some city workers and retirement systems filed lawsuits to prevent Snyder from approving Orr’s bankruptcy request, said Detroit-area turnaround specialist James McTevia.

They have argued that bankruptcy could change pension and retiree benefits, which are guaranteed under state law.

Others are concerned that a bankrupt Detroit will cause businesses large and small to reconsider their operations in the city. But General Motors does not anticipate any impact to its daily operations, the automaker said Thursday in a statement.

Detroit has more than double the population of the Northern California community of Stockton, Calif., which until Detroit had been the largest U.S. city ever to file for bankruptcy when it did so in June 2012.

Before Detroit, the largest municipal bankruptcy filing had involved Jefferson County, Ala., which was more than $4 billion in debt when it filed in 2011. Another recent city to have filed for bankruptcy was San Bernardino, Calif., which took that route in August 2012 after learning it had a $46 million deficit.

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