Detroit files for bankruptcy

Article on CNN
(Full text quoted below)
Detroit filed for bankruptcy Thursday afternoon, becoming the nation's largest public sector bankruptcy. The move could slash pension benefits to city workers and retirees, and leave bond holders with only pennies on the dollar.

The bankruptcy was filed by Emergency Manager Kevyn Orr and approved by Michigan Gov. Rick Snyder. Snyder said the financial condition of the city left him no choice, and that Detroit could not meet its obligation to either its citizens or its creditors.


"We have a great city, but a city going down hill for the last 60 years," he said at an evening press conference. He said 38% of the city's budget is being spent on "legacy costs" such as pensions and debt service, which cuts into spending on city services. He said police take almost an hour to respond to calls, compared to a national average of 11 minutes, and that 40% of street lights in the city are turned off.

"That's unacceptable," he said.

But public employee unions are sure to fight the move, charging that the city did not negotiate in good faith and should not be allowed to walk away from obligations made to employees and retirees.

The Detroit Fire Fighters Association said it was "very disappointed" with the bankruptcy filing.

"We are working with other Detroit employees to form a unified coalition to address the financial concerns of Detroit," the group said. "Detroit's Fire Fighters will continue to protect and serve during this difficult time, regardless of the economic challenges."

Orr already halted payments on about $2 billion in debt last month, saying the city needed to preserve its dwindling supply of cash. The city faces total liabilities of about $18 billion. Orr's reorganization plan calls for cutting $11.5 billion in debt down to $2 billion. That would mean that investors and retirees would receive an average of just 17% of what they are owed. Specific plans for the cuts are unknown at this time.


Cutting retiree's pensions in a municipal bankruptcy has never been done before, said Michael Sweet, a California bankruptcy attorney.

"It's relatively easy to blow off a creditor. It's much harder when it's people who are the fabric of your community," he said. "You need a police force, you need a fire department. You're saying [to them] you're not worth what you were previously promised."

Sweet said that case law on whether pensions can be cut this way is very limited, and it could take years for a court fight over such cuts to work its way to the U.S. Supreme Court. Given the poor state of funding for many public sector pension funds nationwide, "it's a big enough question, that (the Supreme Court) is where it likely will have to go," he said.


When employees of a bankrupt business lose their promised pensions, the Pension Benefit Guarantee Corp. steps in and provides a minimal level of benefits. But that federal agency doesn't back pensions in the public sector.

Retirees and city employees say they can't accept cuts in their pension benefits.

"How am I supposed to live without my pension?" said David Sole, 65, after a protest in Detroit last month. Sole retired from the city's water department in January after 22 years.

Investors say the bankruptcy will make it more difficult for cities and towns everywhere to raise the money they need to build bridges, schools and other infrastructure. It will also hurt municipal bonds held by individual investors. There are more than $1 trillion worth of bonds at risk, said Peter Hayes, head of municipal bonds at BlackRock. He said there will be a ripple effect nationwide.


Orr said that the city needs to cut debt to restore services and lower costs, such as taxes and insurance, which he says have chased businesses and residents out of the city.

Detroit's population has fallen 28% since 2000. The unemployment rate, while down from a peak of 27.8% in the summer of 2009 -- when General Motors (GM, Fortune 500) and Chrysler Group were going through their own bankruptcies -- is still at 16.3%, nearly twice Michigan's statewide average.

While the auto industry has enjoyed a resurgence with strong car sales and profits, most of the industry's Michigan plants lay outside of city limits.

 

Fuck. I didn't even know an entire fucking city could do that.

That's, really bad.

Guy's ... that's bad. Right?

 

It's bad.

 

I wonder if OCP orchestrated this as part of their takeover.

 

"Good business is where you find it."

 

Yup, it is a mess, but the city will go on.

I think Michigan should find the money from the subdivisions around Detroit who are a large part of this. The people have to do their part to improve the city moving forward too.

 

This was a long time coming, not surprised, but the timing is off. When Kevyn Orr couldn't make deals with creditors and the Unions, this was the end result, the only way to move forward. It will take some time for all to be righted, if at all. The burbs needs to help.

I don't live in Detroit, but love the city. I have family near. Love my Red Wings, and Tigers.

 

The City Council has repeatedly rejected any notion of regional economic cooperation. This has been going on for decades. Stubborn idiots are still insisting they can fix things.

 

I wonder if the same thing happened there as it did here. Where one subdivision gets the bright idea that if they don't charge an income tax and only build expensive new homes that the wealthy people will want to live there taking away a lot of tax revenue from the 'city', but still allowing those people access to big events and sports when they feel like it.

 

I believe that is a strong component of Detroit's issues. White collar flight to, primarily, Oakland County to escape Detroit taxes and the "working class" neighborhoods has driven a wedge between the city and the 'burbs. There have been a lot of villains and few heroes in the last 50 years. Greed and bigotry have been the main cause of Detroit's decline, imo.

 

You know I woke up this morning thinking about Detroit and this whole bankruptcy thing and I started wondering. How exactly does a city go bankrupt? A city in the US for that matter. How does this affect the recent nationwide credit rating downgrade that happened a while ago?

Isn't a city made of many, many people? Don't they all add up a significant amount of workforce at the heart of the machine that is industry? How is it even possible?
--- merged: Jul 20, 2013 4:38 PM ---

Just how long do people that influence your economy have to leave in order for you to realize that you need to start attracting more income creating customers? Why not begin a mass creation of jobs to combat the issues they are facing? Offer police officers incentives to respond faster and effectively. Offer home owners tax breaks for upkeep of their property? Offer new buyers additional tax breaks for buying houses. Offer business owners tax breaks for quality services tendered to the city e.g. road upkeep, construction etc etc etc ... ???

Well, how did that happen? Honestly an entire city filing for bankruptcy breaks rules of economics (and my mind). If your bidding for a contract with the govt. against another company surely there should be price takers of all ranges. It simply makes no business sense to be greedy.

 

I especially wanted to hear your take on this, grumpyolddude. So 'white flight' and greedy and/or corrupt politicians are the two largest factors in play in this very sad chapter not only in Detroit's history, but American history. What do you think? Can Detroit come back?
Chicago fell into a similar circumstance, several decades back. Though many would've liked to have had his head for his heavy handed approach, Mayor Richard J Daley revitalized the city with a combination of actions. There are still areas of blight but overall, the city is strong. Could the same happen in Detroit with the right mayor?

 

It saddens me. No city with such history and cultural significance should be allowed to go down the crapper.

Shame on the burbs for not stepping up. Shame on the local and state government for not making Detroit a priority before it reached this stage.

 

In the 70s New York City was on the verge of bankruptcy. The teachers union bought $150 million of municipal bonds and the Federal government eventually provided $2.3 billion worth of loans for 3 years to keep it from falling off the edge. NYC had not reached bankruptcy but was getting close. Detroit is there. But it's not the first to do so, just the largest. Bankrupt Cities, Municipalities List and Map Creditors are going to get a haircut. That includes municipal bond holders. Which may include those of us at TFP if our investments (including 401K or IRA funds) have purchased those bonds. Other city assets may be liquidated to satisfy creditors including contents of museums. Then there is the vexing issue of unfunded pensions (Illinois are you paying attention?). To balance the books so that the city can continue to provide services will be the overriding concern in what is done.

 

There's debate over whether the collection at the DIA is even partially a city asset. I'm fairly certain that the museum is not funded by the city.

 

As someone born in Detroit and a daily commuter, I am pretty heartbroken and upset. I see major revival happening downtown, and I absolutely love hanging out there. It's the outer neighborhoods that are the terrifying money drains in my opinion. They give the city such an awful reputation and one that it doesn't necessarily deserve. This causes the fear of visiting, which causes more white flight, which causes more desperation, which causes more crime, and so on. It seems to be a vicious cycle for those not already familiar with the city.

In summation, I absolutely love the downtown area of Detroit. I go to hockey, baseball, and football games there. I go to Eastern Market for local produce and food at least once a month. I go to the DIA, the Fox, and the science center. I attend school at Wayne State. I am in love with the city, but at the same time, I'm not naive to the issues it is having. I wish what I see in downtown was seen more easily by others.

It took me awhile to respond to this thread, because of how emotional it makes me, and I still didn't compose the response I wanted, so you'll see me again here.

 

The outlined area is Detroit.

It does have some serious problems. Both the city and some of the people need to change.

For me to live there, I would need my job to migrate to Arizona or Florida from Thanksgiving to Easter.