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Detroit: bankrupt (updated)

detroit-police-cars

Today, Detroit became the largest American city to file for bankruptcy, a rare occurence. Despite attempts to fix the city’s finances and some success in attracting new businesses, a declining industrial base, high crime in some areas, fixed expenses, and allegedly rampant corruption have all brought large deficits. The move was made by the city’s emergency manager, Kevin Orr, appointed by Governor Rick Snyder, to deal with $2.5 billion in unsecured debt and a deficit estimated at $380 million; Orr claimed that total long term debt was likely over $17 billion.

The emergency-manager law, criticized by some after other managers appeared to be rewarding campaign donors at the cost of the cities they managed,  allows the governor to appoint a single city leader with wide powers. The law essentially removes all power from elected councils and mayors. Mr. Orr has, however, generally been seen as sincere, and tried to convince creditors to agree to take less money than they were owed, to avoid a bankruptcy. He staged a bus tour of the city’s devastated areas, empty lots, burned-out houses, and abandoned factories, to try to convey the situation to the financial leaders. Before being put in charge of Detroit, he represented Chrysler during its own bankruptcy.

The move comes after a coalition of local businesses donated money and vehicles to help Detroit stay afloat (including the police cars shown above), and after numerous other cost cutting measures.  However, over the course of ten years, from the 2000 census to the 2010 census, the population dropped by around 250,000 people; the city once held nearly two million residents, but has dropped to 700,000. Some neighborhoods of Detroit were well known for their high crime; restaurants served food through bulletproof glass.

The city is likely to slash pensions for retired policemen, firemen, and other employees; assets are likely to be sold. Under Orr’s June proposal to unions, pension funds, long underfunded, would become even more so, taking under 10 cents on the dollar. Technically, pension and retiree benefits are guaranteed under state law, but Mr. Orr said that bankruptcy law would take over, rendering benefits void. This may make it harder to attract qualified emergency personnel, and is likely to result in at least some retirees losing their homes, as the bankruptcy court judge could divert remaining pension funds to other creditors.

Finance experts said both that the filing would not affect other cities, and that other cities would need to pay a hazard premium on their loans.

General Motors issued a statement saying that the bankruptcy would not affect their operations. Chrysler, which operates two assembly plants and two component plants in the city (Conner Ave./Viper, Jefferson Ave./Grand Cherokee and Durango, Mack Ave./engines, Outer Drive/tools and dies), has not yet done so, but is likely to do the same.

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