Detroit, Once-Mighty Motor City, Files for Bankruptcy

×
detroit municipal bankruptcy chapter 9 pensions manufucturing jobs
Carlos Osorio/APIn this 2008 photo, a pedestrian walks by graffiti in downtown Detroit.
By COREY WILLIAMS and ED WHITE

DETROIT -- 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.

Gov. Rick Snyder said Friday that the bankruptcy process would allow for improvements to the city, with a greater emphasis on public safety and other city services, which he acknowledged have long been "unacceptable."

He said it also should offer -- for better or worse -- a more certain path for creditors, who don't know how much or whether they will be paid. The process, he said, would clarify that "this is a debt that can be paid and will be paid," he said.

"Now is our opportunity to stop 60 years of decline," he said.

Still, 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.

detroit bankruptcy revenue deficits unemployment expeditures layoffs assetsNow 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.

A Crumbling Landscape

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.

Two public employee pension systems are the top unsecured creditors, according to bankruptcy documents. The city General Retirement System's claim is just more than $2 billion. The Police and Fire Retirement System is owed more than $1.4 billion. The documents filed also show more than 100,000 creditors that include individual retirees, city workers, banks, other businesses, property owners and litigants, though amounts owed aren't listed.

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.

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.

'Burden of Impossible Obligations'

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 (GM) doesn't 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.


Increase your money and finance knowledge from home

Behavioral Finance

Why do investors make the decisions that they do?

View Course »

Investing in Emerging Markets

Learn to invest in a globalized world.

View Course »

Add a Comment

*0 / 3000 Character Maximum

16 Comments

Filter by:
nthereoff

I Blame the Big 3 for their problems. Always bought American car s until I bought my first Toyota. Over 100.000 miles and runs as good as the day I bought it. Most American cars I owned reach 100.000 and it was time to buy another. With the prices of new cars today ,I want and need my moneys worth. American car company never kept up with the times. They bet the good old days would last forever And lost. Sorry for Detroit and the people living there,hope they can turn it around

July 19 2013 at 10:24 AM Report abuse +5 rate up rate down Reply
Sonny

Motown to Broke Town................. Who was in charge when all of this corruption was going on?

July 19 2013 at 10:13 AM Report abuse -5 rate up rate down Reply
jrb359

Democrats at work. Again mismanaging money! How many mayors agreed to lucrative union contracts knowing full right well that they could not meet it's financial obligation. Now they have 20,000 city workers whose pensions are in jeopardy! Obama is a Progressive and will probably bail them out in spite of their pathetic mismanagement of funds!

July 19 2013 at 9:32 AM Report abuse -4 rate up rate down Reply
y2kcatz

maybe the USA government should spend their trillions of dollars in the USA vs sending the $$ to Siria.??? just saying.

July 19 2013 at 9:09 AM Report abuse +6 rate up rate down Reply
johndson

So how is "corporations are people" working out? GM is on the rebound, FORD - doing just fine, Chrysler - holding its own. But consumers, which support 70% of the economy, are NOT fine. Consumers did NOT get bailed out. Consumers did NOT get tax breaks. Unlike CEO's salaries and compensation, which continues to unrealistically soar, consumer wages are stuck in the same narrow bracket for decades!! And no this is not simply a unions problem either. Detroit's population, once 2 million is now about 700,000. Detroit has been shrinking and withering for over 20 years, with no significant attempts to reverse any of the cause and effects, that brought us to this bankruptcy. When are we going to learn that our economy is CONSUMER driven not corporate driven? Detroit is not the disease, Detroit is simply another symptom of our national malaise that is killing consumers and therefore undermining our economy.

July 19 2013 at 8:39 AM Report abuse +3 rate up rate down Reply
1 reply to johndson's comment
Sonny

The politicians and unions in Detroit have RUN these businesses out, and now they are reaping the fruits................. These businesses left, and never looked back at that cesspool..........!

July 19 2013 at 10:18 AM Report abuse -5 rate up rate down Reply
jaguare70

The plan is to sell it off cheap and privatize it. Detroit will be the first major city to be owned by a few individuals.

July 19 2013 at 8:33 AM Report abuse +2 rate up rate down Reply
1 reply to jaguare70's comment
Sonny

Who........ Jesse, Al, and the NAACP?

July 19 2013 at 10:18 AM Report abuse -5 rate up rate down Reply
clamshack208

This is why public Unions also need to fight the welfare state. The guy who actually worked for it will lose out to the guy who never lifted a finger for it. The two can not co-exist forever. It's too much for the taxpayer. Unions never should have sided with Socialists. These people sell out their own kids with massive spending & debt. Now they are coming for your pensions.

July 19 2013 at 6:30 AM Report abuse -1 rate up rate down Reply
1 reply to clamshack208's comment
Sonny

Exactly............Socialism isn't working out to well for the unions, is it? In the end, socialism will not only take their pensions, but their jobs ,as well. They deserve it, because they have fallen for these lies................

July 19 2013 at 10:20 AM Report abuse -7 rate up rate down Reply
Steve Hall

I thought Kid Rock and Eminem were going to save that place...yeah right!

July 19 2013 at 12:43 AM Report abuse +1 rate up rate down Reply
h.hughjardon

Has obama offered to buy the city with borrowed tax dollars yet?

July 18 2013 at 11:59 PM Report abuse -6 rate up rate down Reply
h.hughjardon

And how are you liming the new GM plant in China now?

July 18 2013 at 11:58 PM Report abuse -10 rate up rate down Reply
1 reply to h.hughjardon's comment
h.hughjardon

Liking

July 18 2013 at 11:59 PM Report abuse -6 rate up rate down Reply