Detroit Owes $18 Billion: Motor City Is Bankrupt

Kevyn Orr, Detroit’s emergency manager, has failed to save Detroit despite holding free rein over the city’s finances. Detroit has arrived at the point of no return with plummeting tax receipts, ever-increasing healthcare costs and pension payouts, and attempts to fill the funding chasm with bank loans.

Detroit has not succeeded. After months of debates, discussions and worry, as well as the appointment of an emergency manager that should have been able to handle the crisis, the cradle of the automobile industry has had to declare bankruptcy. Detroit owes $18 billion, confirmed Orr, leaving the impression that the chasm could reach $20 billion. “This is a difficult step, but the only viable option to address a problem that has been six decades in the making,” explained Rick Snyder, Michigan’s governor, who officially authorized the request to file for bankruptcy. Detroit is the largest American city to file for bankruptcy in U.S. history. One of the immediate consequences of this decision will be that thousands of public employees will see their salaries and pension benefits cut.

Orr, a 54-year-old lawyer specializing in bankruptcy law who was appointed by Snyder last March in a last desperate attempt to save the city’s finances, was unsuccessful in his efforts. Orr was given free rein in his control of the city’s finances, with the power to cut spending, sell public property, renegotiate the salaries of public employees and suspend the salaries of both the mayor and the city’s councilmen. Orr was expected to recuperate $15 million a month over the course of 18 months — the duration of his appointment. He resigned only a few months into his appointment, under the weight of a crisis that no amount of spending cuts could have put right. Analysts now cite the following causes as among those that brought Detroit to the point of no return: the major reduction in tax receipts, no longer sufficient to finance the massive costs of a city of almost 140 square miles; the ever increasing spending for pensions and healthcare; and repeated attempts to fill the funding chasm in Detroit’s finances with bank loans.

It is not a surprise that Detroit has filed for bankruptcy. The center of remarkable economic development in the first half of the twentieth century with the rise of the automobile industry, Michigan’s largest city has been rapidly declining over the past few decades. Detroit had a population of 1.8 million inhabitants in 1950. Today, 700,000 people make their home in Detroit and live in one of the most deprived urban areas of the United States — an area marked by racial tensions and poverty, entire sections of which are abandoned residential apartment buildings, industrial sectors that resemble war zones, lighting on only 40 percent of streets and half of public parks in a state of closure since 2008. At the moment there is no definite “road map” to manage Detroit’s insolvency. Probably one of the first steps will be to discuss the details of Detroit’s finances in the courtroom, with the aim of showing that its financial situation is out of control and can no longer be managed. Once the city’s bankruptcy claim has been approved, the unpleasant work will begin — that of negotiating the debt with regards to service providers, public employees and pensioners.

Over the past few days, the debate about the consequences and the benefits of filing for bankruptcy has been intense and in some cases even violent. Some people, especially labor union representatives, have been on the alert against a move that would further risk destroying the city’s economy. Declaring bankruptcy means making radical cuts to the salaries of local government employees and the pensions of those who worked for Motor City. Declaring bankruptcy means obtaining bank credits will be difficult and there will be additional cuts to services. Others — above all the business world and what remains of Detroit’s industry — have interpreted the bankruptcy claim as a “new start,” offering a decisive reduction in costs and financial responsibilities.

It is certain that every move made by Detroit’s administrators over the next few weeks will be scrutinized by labor union representatives, municipal bond market players and other cities in the United States that find themselves under the threat of bankruptcy. Starting from the mid-1950s, 60 American cities and counties filed for bankruptcy protection under Chapter 9, which provides financially distressed municipalities with protection. Until Detroit, Jefferson County in Alabama was the largest Chapter 9 bankruptcy filing, with a deficit of $4 billion. Detroit’s bankruptcy claim will also probably increase the city’s racial and ethnic divides and tensions. African-Americans make up 80 percent of the city’s population and mainly vote for Democrats. Time and again, the looming threat of bankruptcy has been interpreted as an attempt by Michigan’s white and Republican elite to take control of the city’s finances.