The Motor City Goes Bankrupt

Andrew Klips |

Calling it a “difficult, painful step,” Michigan Governor Rick Snyder on Thursday authorized Detroit’s emergency manager Kevyn Orr to seek bankruptcy protection for the struggling city, saying that there were no other viable options.  It’s the largest municipal bankruptcy case in the history of the United States.

Governor Snyder had appointed Orr emergency manager of Detroit in March to try and negotiate agreements with creditors, bondholders, pension managers, etc. and avert court intervention, to no avail.  Orr had warned before that if creditors wouldn’t accept what he had to offer given Detroit’s extremely limited resources, that he would seek bankruptcy protection, although that was definitely not his preferred course of action.

“Let me be blunt…Detroit’s broke,” said Snyder in a video on the official Michigan website.  Some other key points made by the governor:

·       Detroit has been spending 38 cents of every dollar on legacy expenses with projections for that figure to increase to 65 cents on the dollar

·       Services have suffered:  Detroit has been in the top 10 most violent cities in 24 of the past 27 years.  Average response time to a police call is 58 minutes, compared to a national average of 11 minutes.  The clearance rate on cases is 8.7 percent.

·       The citizens of Detroit already pay the highest taxes per capita in Michigan.

The city is a shell of its former self as an automotive powerhouse and a music hub.  In the 1950’s, nearly two million people lived within city limits.  In 2012, Detroit’s population was down to 701,475, marking the lowest level of residents since 1910, when the automotive boom began.  In the first decade of the 21st century, Detroit’s population fell by 25 percent.

The Chapter 9 bankruptcy case was filed in the U.S. District Court for the Eastern District of Michigan on Thursday, a culmination of decades leading to mounting debt, poor management, exodus of people and business (and their tax dollars) to the suburbs, real estate collapse and cuts in state funding.  Orr said that Detroit’s long-term debt was at least $14 billion and likely between $17 and $20 billion.  The city also recently missed a $40-million payment to the city’s pension system.  For the 2013 budget year, the city was facing a $162 million cash shortfall.  Krystal Crittendon, an attorney for Detroit, questioned Orr’s figures, saying the city’s debt was not as large as reported.

The bankruptcy may provide a fresh start for the once-bustling city, but it is certainly not a cure-all.  Some are concerned that the bankruptcy will impact pensions and retirement benefits, which are guaranteed under state law, but this is now a federal matter.  The city has slashed its police force and cut back in countless other areas to try and clean up its balance sheet for several years.  Those already strained services could face additional cuts, meaning that, like so many things, it may get worse before it gets better.

General Motors (GM) did it; the Motor City can too.

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Companies

Symbol Name Price Change % Volume
CGAC Code Green Apparel Corp 0.01 0.00 0.00 0
GM General Motors Company 32.12 -0.27 -0.83 9,812,127

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