The city of Detroit announced on Thursday that it plans to file for bankruptcy–making it the largest American city ever to take such a course. The city’s debt is likely to be $18 billion and perhaps as much as $20 billion. It is reported to be the largest municipal bankruptcy filing in American history in terms of debt.
In the first half of the 20th century, Detroit expanded at a stunning rate with the arrival of the automobile industry and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.
Numerous factors over many years has brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.
The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities around the country. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.
Detroit’s recovery is a process that could take months, if not years, and is expected to be costly and complex. Bankruptcy experts anticipate benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on borrowing. In fact, Detroit’s pension shortfall accounts for about $3.5 billion of the $18 billion in debts. Detroit retirees are helplessly starting to worry that their pensions will be cut.
A White House spokeswoman said President Obama and his senior team are closely monitoring the situation. Four years ago, the Obama administration bailed out two Detroit automakers, pouring $80 billion into General Motors and Chrysler Group to see them through their bankruptcies—but this time, the administration will most likely not assist in a bailout. Kevyn Orr, the emergency manager appointed to oversee Detroit’s finances, told CNN that he never asked the White House for help before deciding to go ahead with the bankruptcy filing…”We have to solve these problems ourselves.” He doesn’t expect Detroit to be bailed out this time around–especially with so many other local governments around the country facing their own financial problems.
Around the city, there is widespread uncertainty about what bankruptcy will mean, now and in the long term. Officials say city workers are being sent letters, notifying them that city business would proceed as usual, from bills to permits. A hot line is planned for residents and others with questions and worries.
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