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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We'll return now to news in Detroit. The city has filed for bankruptcy as it tries to tackle a deficit of about $380 million. We've got NPR's Quinn Klinefelter back on the line. He joins us from member station WDET to talk more about it. And, Quinn, first of all, take us back a little bit. How did the city get into such a dire fiscal mess?

QUINN KLINEFELTER, BYLINE: Well, the simple fact is Detroit is in a financial crisis. It's insolvent. It's been borrowing money to pay its bills for nearly a decade. There's been a massive population loss. In the last census, it lost about a quarter of its population in just that 10 years. At one point, Detroit had nearly two million people, and now probably just a bit under 700,000.

It's a dwindling tax base, less money to pay for city services, and it has borrowed and borrowed and borrowed to fill that up. It's finally got into a point where the city is unable, at times, to meet its cash flow, and that was the gist that forced the governor to actually appoint an emergency manager over the city. And the manager they chose was a bankruptcy attorney, somebody that has much expertise in this situation.

So it's not a surprising development, but it is one that still, at this point, makes some people, I think, in the city catch their breath. It's the largest municipality ever to declare this type of thing.

CORNISH: And the state-appointed emergency manager, his name is Kevyn Orr. He's been there since March, and there was some hope that he actually could help avoid bankruptcy, right? I mean, I know you said he's a bankruptcy attorney, but why is he now supporting this as the best option?

KLINEFELTER: He's been dealing with the creditors, with unions, with people that are owed pensions, trying to get them to actually accept much less than what the city actually owes them in order to try to cut what the city has to pay out, as much as offering them 10 cents on the dollar that they owe, and instead, those places have fought back.

The city's two largest pension funds, which probably have over $9 billion in unfunded pension and retiree health care liabilities, have filed suits. There was going to be a hearing next week in a state court to try to prevent Orr from cutting those benefits as part of any bankruptcy process.

The city has been working to try to do something with those. They even offered to take them on a tour of some of the worst areas of Detroit to try to show them that there was some kind of a need for them so that you're only going to get so much if you don't play ball.

But spokespeople for Kevyn Orr, the emergency manager that you mentioned, say that the pension boards, the insurers, he says if it's clear if you're suing us, then you're not wanting to play ball. And so they have to look at some other solution, and that solution, which has been the hammer they've held over their heads for some time, is bankruptcy.

CORNISH: Now, hearing you talk about all this wrangling with creditors and the fact that the city had to borrow money from the state to meet the municipal payroll, how might bankruptcy change life for people in Detroit?

KLINEFELTER: It's going to change it very likely for people that are owed money because they worked for the city of Detroit, people that have pensions, police, fire, city workers, people that have got their future, in many ways, staked on the fact that they did their 20 or 30 years and were going to get X amounts in benefits when they got out, medical and some kind of a supplement, a pension.

That is just not going to be there. The city cannot afford that. According to estimates by Kevyn Orr, it could be as much as facing $20 billion in long-term debt, and a fair amount of that is pensions that it owes. Also, a fair amount of it is paying back the bonds that it's had to take to try to stay afloat. So these people, in retirement, are going to be missing some of that.

Also, to try to stave off some of this, the bankruptcy judge very well could sell off a lot of assets for the city of Detroit. Belle Isle is one of the popular spots for people to go to. There could be taking that away from, quote, "city control." The Detroit Institute of Arts has a number of very expensive museum artifacts that could be taken somewhere. I mean, it could go so far as the original "Howdy Doody" puppet, which could fetch a fair amount in some place. It could actually be up for sale to try to help pay off some of this debt.

CORNISH: Quinn, thank you so much.


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