Once the very symbol of American industrial might, Detroit became the
biggest U.S. city to file for bankruptcy Thursday, its finances ravaged
and its neighborhoods hollowed out by a long, slow decline in
population and auto manufacturing.
The filing, which had been
feared for months, put the city on an uncertain course that could mean
laying off municipal employees, selling off assets, raising fees and
scaling back basic services such as trash collection and snow plowing,
which have already been slashed.
“Only one feasible path offers a way out,” Gov. Rick Snyder said in a letter approving the move.
PDF: Read the bankruptcy filing
The
filing marked a turning point for city and state leaders, who must now
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 the city’s fiscal free-fall, said Detroit would
continue paying 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 starting 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.
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.
Detroit lost a quarter-million residents between 2000 and 2010. Today, the population struggles to stay above 700,000.
In recent months, the city has relied on state-backed bond money to meet payroll for its 10,000 employees.
“It’s
an embarrassment, number one, to come to the realization that we’re
actually in this situation,” said Kevin Frederick, an admissions
representative for a local career training school. “Not that we didn’t
see it coming. I guess we have to take a couple of steps backward to
move forward.”
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.
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. His letter
was attached to Orr’s bankruptcy filing.
Creditors and public
servants “deserve to know what promises the city can and will keep,”
Snyder wrote. “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 18-month tenure in Detroit that
bankruptcy was a road he preferred to avoid.
In June, he laid out
his plans in meetings with debt holders. Some creditors were asked to
take about 10 cents on the dollar of what the city owed them.
Underfunded pension claims would have received less than the 10 cents on
the dollar under that plan.
Orr’s team of financial experts said
that proposal was Detroit’s one shot to permanently fix its fiscal
problems. The team said Detroit was defaulting on about $2.5 billion in
unsecured debt to “conserve cash” for police, fire and other services.
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.
¦ Full coverage: Detroit’s financial crisis
No comments:
Post a Comment