Detroit bankruptcy filing comes after long financial decline
City ranks first among the 50 highest-taxing cities in the US
The city’s state-appointed emergency manager, Kevyn Orr, has said there must be “significant cuts” in retirement pay to 21,000 retired city workers and their widows, and to accruing pension benefits for 10,000 current workers.
Orr was forced to seek bankruptcy protection after he was unable to reach agreement with bondholders and other creditors on an out-of-court writedown on their debts.
The city’s pension deficit amounts to about a sixth of Detroit’s total liabilities of up to $20 billion. Orr said this week that when he was appointed in March, he was told that the city’s liabilities were $14 billion but he has since discovered further debts. He must restructure these debts in a process that could take months, if not years. The timing is unclear as no American city has undergone a reorganisation of this scale.
About $9 billion of the debt is secured and considered off-limits to writedowns. The battle between bondholders and other creditors will be fought over $11 billion of unsecured debt, which includes $2 billion in general obligation bonds and other financing, $3.5 billion due to the pensions fund and almost $6 billion due in health insurance and other worker benefits.
Orr’s out-of-court plan involved a haircut of 83 per cent on $11 billion of unsecured debt. As details of the bankruptcy restructuring are yet to emerge, it is not known how these or higher losses will shared among 100,000 unsecured bondholders and current and former city workers, but it is clear workers and retirees, paid an average of $1,600 a month, are in line for smaller pension cheques.
Bondholder interest groups have warned that repaying them just a few cent on the dollar could lead to higher borrowings costs for other cities in Michigan and across the US.
Detroit can forget about a bailout from the federal government as Democrats and Republicans struggle to agree on their own debt problems. The city will have to carry out the financial repairs on its own – it could be years before Detroit is motoring again, if at all.
There was an unexpected development late on Friday when a Michigan judge ruled that Detroit’s bankruptcy filing violated the state’s constitution and asked the state’s governor to withdraw it. The ruling will be appealed.