Detroit files for bankruptcy despite automakers’ success

Written by Max Ehrenfreund

After years of financial decline, the city of Detroit filed for federal bankruptcy protection on Thursday in the largest such filing in U.S. history. The city’s state-appointed emergency manager, Kevyn Orr, and Gov. Rick Snyder (R) said that other options had been exhausted:

Orr said that during the bankruptcy, employees would be paid and the city would pay its bills — and perhaps, for the first time in awhile, pay those bills on time. He said there will be a hotline city vendors can call if they do not get paid.

Orr also said he would appoint a committee to represent retirees in negotiations over underfunded pension plans.

But, he said, there was little choice other than bankruptcy, given Detroit’s towering debt and limited tax revenues. Comparing the city’s spending needs and debt payments, he said, “There’s no way home from that equation.” He added: “I’d be happy to listen to any other plan someone can come up with given the restraints we’re working under. The reality is . . .with $12 billion in unsecured debt, there’s precious little we can do.” . . .

The city, which was the nation’s fourth-largest in the 1950s, with nearly 2 million residents, has seen its population dwindle to 700,00, as people fled rising crime and deteriorating services, taking their tax dollars with them.

In March, as Detroit faced an estimated debt of $19 billion, Michigan named Orr an emergency manager, vested with extraordinary powers to rewrite contracts and liquidate some of the city’s most valuable assets. That led to once-unthinkable proposals, such as forcing public employees to cut their retirement benefits or demanding that investors in municipal bonds — long considered among the safest investments — take pennies on the dollars they lent to Detroit. In recent days, both of those groups objected, propelling the city to file for bankruptcy. Michael Fletcher and Steven Mufson

After years of financial struggle, Detroit filed for Chapter 9 Federal Bankruptcy Protection, the largest U.S. city to do so. (Associated Press)

The filing sets up a conflict among Detroit’s creditors, with bondholders likely to receive more of what they’re owed by the city:

Detroit is about $18 billion in debt, and will only be able to pay out a fraction of that in the short term. The two main groups of creditors arguing they’re entitled to that money are public employees and retirees, and bond holders. The investors are likely to make out better, since more of that debt is secured; the city will continue to pay water and sewer bondholders. Most of the pension debt has no similar backstop.

City residents will likely suffer a lack of anything other than the most rudimentary public services for a long time, but the impact is likely to be felt most keenly by those who lost a large chunk of the retirement they were counting on.

[Unions are] livid about the likelihood of restructured pensions and health benefits, having already offered large concessions, and say they were trying to come to a solution before Orr raced to the courthouse to file the bankruptcy petition Thursday. And they’ve vowed to fight any default of the city’s obligations (“It’s war,” says the head of the police and fire pension fund). So far, though, there’s been no talk of work stoppages; city services will continue as normal. Lydia DePillis

Detroit’s decline has continued even as the major automakers that once supported the city’s economy have been doing well:

From 1910 to 1950, Detroit’s economy was synonymous with car manufacturing. The city was filled with dozens of factories churning out everything from Cadillacs to Studebakers — plus auto-parts plants, steel mills, foundries… Detroit’s population swelled to 1.8 million as workers came from all over the country in search of good-paying jobs.

Even then, much of the auto industry’s industrial base wasn’t in the city proper. “From the very start, auto manufacturers preferred to locate in the suburbs—often as a tax dodge,” explains Kevin Boyle, a historian at Northwestern University and native of Detroit. Ford’s giant River Rouge Complex, which employed 100,000 people at its peak, was outside city limits. Even so, enough workers lived in the city to keep Detroit booming.

But starting in 1950, automakers began moving more and more of their operations further away. They looked for space in Detroit’s suburbs and exurbs to build bigger plants as they began automating operations. (“You couldn’t build those automated factories inside the city,” Boyle explains.) They opened up plants in other states to be closer to customers. They shifted production overseas, to Mexico and Brazil, in order to save on costs. . .

Today, there are only two auto factories left in Detroit. GM has its headquarters downtown (the company was required to stay as part of the auto bailout in 2009) and assembles the plug-in Chevy Volt at its Poletown plant, employing nearly 3,000 people in all. Similarly, Chrysler has moved some of its offices downtown and employs more than 4,000 people in its Jefferson North Assembly plant, which produces the Jeep Grand Cherokee.

But that’s it. Most of the Big Three’s main operations remain outside city limits. Chrysler’s suburban headquarters, where 10,000 people work, is in Auburn Hills, about 30 miles from the city proper. Ford is based in nearby Dearborn and hasn’t manufactured cars inside the city since it was cranking out Model Ts in the 1910s. Brad Plumer

Keith Richburg remembers the city where he grew up:

The Detroit I remember ceased to exist a long time ago. But it was kept alive by a pride, a nostalgia for its former glory, and an illusion that revival was just around the next corner. We who love Detroit — even people like me who abandoned it long ago — were all complicit. I could visit for a week or a weekend, set the rental car stereo to the Motown oldies or classic Detroit rock songs from a bygone era, take in a Tigers game, have a hot dog and a Vernor’s ginger ale at Lafayette Coney Island downtown, and comfort myself with the fiction that this was still the same city I knew growing up as a kid.

Of course, the old neighborhoods are nothing like they were. My older cousins and aunties in their 70s, 80s and 90s are still in the same houses as before. But theirs are some of the few houses still standing on streets that are now mostly abandoned; they live behind metal burglar bars on their windows and the curtains and shades pulled tight. If I go in the winter, I know their streets will never be cleared of snow and ice, so the driving is treacherous. And I never go out at night. My old house on McGraw Street burned down and was reduced to rubble years ago.

Most of the old-time residents say they never plan to move, even though city services are virtually nonexistent in the old neighborhoods and most of the neighbors are gone. It’s a pride, a stubbornness and an attitude of “I bought this home 40 years ago, and no crack addicts or gangbangers are going to drive me out of it!”

It’s that attitude that led many Detroiters to instantly reject Mayor Dave Bing’s plan to shrink the size of the sprawling city to geographically consolidate the people, and the services. It’s an admirable obstinacy Detroiters have. It’s also why the city was destined to go bust. Keith Richburg

Still, there is reason for optimism in Detroit, according to Jennifer Bradley of the Brookings Institution:

There are other parts of Detroit that I feel are not going to be mentioned at all in this story, and that’s the downtown/midtown area, along the Woodward corridor spine, where there’s a lot of good stuff happening. There’s new small businesses, there’s business incubators, there’s a rental occupancy of 97 percent. There’s Dan Gilbert investing a billion dollars in buying up these great old properties in the downtown, and repurposing them for small businesses and start-ups. That’s also true. The bankruptcy of the Detroit government doesn’t erase all the good things that are still happening in Detroit with private money and philanthropic money and some state and federal money. Bankruptcy is such a big scary word, but on the ground, we’ve gotten assurances from Orr, and some really great language from Snyder — he just finished a press conference where he said Detroit is really central to the state. In the filing, Detroit says the way to get better is not to spend less money on services, but more money on services. So on the ground day to day, the way it was before the word bankruptcy and after the word bankruptcy is not very different. Lydia DePillis

See images from Detroit’s history below.

 
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