City of Detroit files biggest-ever US municipal bankruptcy

Federal bankruptcy court filing had been feared for months

Fri, Jul 19, 2013, 10:12

Detroit, once the symbol of American industrial might, has become the biggest US city to file for bankruptcy, its finances ravaged and its neighbourhoods hollowed out by a long, slow decline in population and car making.

The federal bankruptcy court filing, which had been feared for months, conserves cash so the city can operate but it will hurt Detroit’s image for years.

It could mean shedding municipal workers, selling off assets, raising fees and scaling back basic services such as rubbish collection and snow ploughing, which have already been slashed.

Kevin Orr, a bankruptcy expert hired by the state in March to stop Detroit’s fiscal free-fall, chose bankruptcy over diverting money from police, fire and other services to make debt payments.

For decades, Detroit paid its bills by borrowing money while struggling to provide the most basic of services for its residents. “Only one feasible path offers a way out,” Michigan governor Rick Snyder said in a letter approving the bankruptcy filing.

It took decades of decay to bring down the industrial giant that put the world on wheels. The city grew to 1.8 million people in the 1950s, luring them with plentiful jobs and paid good wages to stamp out automobile for sale across the globe. But like many American cities, Detroit’s fall began late that decade as developers starting building suburbs.

At the same time, auto companies began opening plants in other cities, and the rise of cars imported from Japan started to cut the size of the US vehicle industry.

Detroit’s property values fell, tax revenue dropped, police could not control a growing murder rate, and many middle-class blacks fled the city for safer suburbs with better schools.

Detroit lost a quarter of a million residents between 2000 and 2010. Today it’s barely above 700,000. Much of the middle-class and scores of businesses also have fled the city, taking their tax dollars with them. The city is littered with abandoned factories built in the postwar boom years, most of which have multiple stories.

As the Japanese auto invasion began cutting into Detroit’s sales, General Motors, Chrysler, Ford and hundreds of car parts companies looked outside the city to build one-storey plants that could handle modern assembly lines.

By the time the car industry melted down in 2009, along with the economy as a whole, only a few factories from GM and Chrysler were left. GM is the only one with headquarters in Detroit.

Government corruption under former mayor Kwame Kilpatrick only made things worse. A jury convicted the once-popular Kilpatrick in March of racketeering conspiracy and other crimes after a trial that portrayed him as an unscrupulous political who took bribes and rigged contracts while in office until 2008.

The current mayor, former basketball great Dave Bing, announced in May that he would not seek a second term and angrily denounced Michigan officials for not giving him enough time to solve Detroit’s financial problems on his own.

In recent months, the city has relied on state-backed bond money to meet payroll for its 10,000 employees. Michael Sweet, a bankruptcy lawyer 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,” Mr Sweet said. “And no-one can sue them.” Mr Orr was unable to persuade a host of creditors, unions and pension boards to take pennies on the dollar to help bring about the city’s massive financial restructuring.

If the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment. Mr Snyder determined earlier this year that Detroit was in a financial emergency and without a plan for improvement. He made it the largest US city to fall under state oversight when a state loan board hired Mr Orr.

Turnaround specialist Mr Orr represented car maker Chrysler 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. 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 dollars. Mr Orr has said long-term debt was more than $14 billion and could be between $17 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 bankruptcy, does not anticipate any impact to its daily operations, the car maker said. “GM is proud to call Detroit home and today’s bankruptcy declaration is a day that we and others hoped would not come,” it said.

AP