Detroit Files For Bankruptcy

Jul 18, 2013
Originally published on July 19, 2013 4:32 am

(This story last updated at 6:45 p.m. ET)

The city of Detroit has filed the largest municipal bankruptcy in U.S. history, seeking Chapter 9 protection from creditors and unions owed some $18.5 billion in debt and liabilities.

In a news conference on Thursday, Detroit Mayor Dave Bing said he didn't want to go into bankruptcy, but the city will now "have to make the best of it."

The city's state-appointed emergency financial manager, Kevyn Orr, said the move was a 'step toward restoring the city.'

The 16-page petition was filed in U.S. Bankruptcy Court in Detroit Thursday afternoon, beginning a 30- to 90-day evaluation period to determine whether the city is eligible for Chapter 9.

In a letter to Orr, Gov. Rick Snyder approved the move, saying: "Only one feasible path offers a way out."

The Associated Press says that "if approved, the filing would allow Orr to liquidate city assets to satisfy a host of creditors and city pensioners lined up to recoup losses from bad bond investments and unpaid contracts."

The Wall Street Journal reports that the city's strategy, unveiled last month, is "to pay off the majority of what secured creditors such as certain bondholders are owed while offering pennies on the dollar to unsecured bondholders, unions and pension funds."

Detroit lost some 250,000 in the decade from 2000 to 2010, with much of the middle class and many businesses fleeing to the suburbs, destroying the city's once large tax base.

Quinn Klinefelter of member station WDET in Detroit, says the move is "not a surprisingly development, but [it] ... makes some people in the city catch their breath."

Hardest hit, he says, will be anyone who was expecting a pension from the city — police, firefighters, city workers, "people who have their future staked on the fact that they did their 20 or 30 years and were going to get x amount in benefits when they got out. .... That is just not going to be there. The city can't afford it."

Reuters reports:

"A judge in Ingham County, where the state capital Lansing is located, has scheduled a hearing Monday on a proposed injunction that would prevent Orr from a bankruptcy filing.

"City retirees and workers made arguments in the two lawsuits that Orr's plan to slash vested pensions for city retirees would violate strong protections in the Michigan constitution for retirement benefits of public-sector workers.

"The pension funds' lawsuit makes similar claims. It also was filed in Ingham County Circuit Court, by the city's two funds — the General Retirement System and the Police and Fire Retirement System."

Mike Lafaive of the Mackinac Center for Public Policy in Midland, Mich., tells NPR that the city had no other choice. "They are facing a financial situation that has been brewing for decades," he says.

"It's municipal bankruptcy territory that is largely uncharted," he says. "We haven't seen the type of numbers we're looking at in Detroit or anywhere else."

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It's official: Detroit is now the largest city in U.S. history to declare bankruptcy, by far. The Chapter 9 filing came today. Detroit faces a long-term debt estimated at a whopping 18- to $20 billion. Here's Detroit's mayor, Dave Bing, at a news conference today.

MAYOR DAVE BING: As tough as this is - I really didn't want to go in this direction. But now that we're here, we have to make the best of it.

BLOCK: And Quinn Klinefelter, of member station WDET, joins us now to talk about it. Quinn, first of all, why don't you take us back and explain how the city got into such a dire financial mess.

QUINN KLINEFELTER, BYLINE: Well, the fact is, it's in a financial crisis and has been for some time. The city's population has dwindled over the last 10 years or so. A quarter of the people left. It was, at one point, up to 2 million people; now, less than 700,000. The tax base has gone with it.

And the city borrowed and borrowed and borrowed to stay afloat, to be able to meet the payroll. Back in 2005, 2006, it took out a fair amount of bonds, just to be able to pay off the pensions that it owed retired city workers. And it was defaulting on those by 2009. It has gotten to a point now where the governor had to declare a financial emergency in the city and appointed this emergency manager, Kevyn Orr, over it. And now, Orr has said that there's no other recourse than to take the city into what will be the largest municipal Chapter 9 bankruptcy in the history of the U.S.

BLOCK: You mentioned the emergency manager, Kevyn Orr, appointed by the Republican governor, Rick Snyder. He's been in charge - in March. And there was hope that he could help the city avoid a bankruptcy. But now, he seems to be saying there's no way; this is the way we have to go.

KLINEFELTER: He says, in fact, that he bent over backwards trying to work with creditors; says he offered them olive branch after olive branch. But the olive branches were not that sweet, to be honest. The - 10 cents on every dollar that they owe the city of Detroit, was what he was basically saying. And as you mentioned, a long-term debt - $18 billion, maybe $20 billion worth. A lot of these creditors just did not want to try to go. There was insurance companies that were already saying they didn't agree with Orr's plan.

Some of the pension groups, which are owed a fair amount of that many billions of dollars, had already filed suits. And in fact, that might have been what forced Orr's hand because they were trying to seek some type of an injunction that would say that the city could not go bankrupt until their case was decided. Instead, Orr more or less beat them to the punch in court; declared the bankruptcy much more quickly, really, than a lot of people had anticipated. And that actually puts a halt to those lawsuits - at least for a time - although they are trying to get a restraining order to try to see if, in fact, they can stop the bankruptcy still.

BLOCK: Well, if Detroit hasn't been able to pay its creditors for months now, and it's had to borrow money from the state to meet the municipal payroll, how is bankruptcy now going to change life for people there?

KLINEFELTER: Well, the mayor and Orr both say that there should be no discernible change immediately. They say that city workers will still receive paychecks, that people won't see any change in the services as provided. But then again, that's not the greatest thing. The services in Detroit have not been at the highest level for some time; in fact, in large part because they haven't had the finances to be able to improve equipment and so on. And so that will stay about the same. And in Orr's plan, once a bankruptcy would be completed, he says he'll actually inject more money to try to improve public safety.

What people may see, in the long run, is what some of them would refer to as Detroit's jewels. Belle Isle, an island that many people go to vacation at; some artifacts in the Detroit Institute of Arts - some pretty expensive pieces of artwork, even the "Howdy Doody" puppet, the original one; these could be sold off to try to pay some of the city's outstanding debts. And so there could be a change in the long run, for things that people in Detroit have been used to having for some time.

BLOCK: OK, Quinn, thanks so much for talking to us.


BLOCK: That's Quinn Klinefelter, of member station WDET. We were talking about Detroit's Chapter 9 bankruptcy filing today. Transcript provided by NPR, Copyright NPR.