In March, as Detroit faced an estimated debt of $19 billion, Michigan appointed 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.
In a sign of Detroit’s dire fiscal situation, few officials and lawmakers in Michigan or Washington vigorously protested the decision — a far cry from the 1970s, when President Gerald R. Ford intervened with federal loans to prevent New York City from falling into bankruptcy. That there is far less stigma now could encourage other distressed cities and towns to follow Detroit’s lead, some analysts worry.
Detroit’s deterioration, which started in earnest after the 1967 race riots were among the most violent in the country’s history, has accelerated in recent years.
In the 1950s, Detroit, known worldwide as the Motor City, had one of the highest per capita incomes in the country when auto plants were hiring wholesale. Now it has the highest rate of violent crime among the nation’s big cities. Average police response time is almost an hour. Nearly 80,000 buildings are abandoned or seriously blighted, and 40 percent of the city’s streetlights do not work. The jobless rate is above 18 percent, more than twice the national rate.
The abysmal services encouraged more people to flee. The city lost more than a quarter-million residents from 2000 to 2012. Tax revenue and state aid have plummeted as the auto industry hit hard times, crimping Michigan’s finances. Its best-known cultural export, Motown Records, left long ago.
To plug its deficits, the city borrowed huge sums over the years. And the state-appointed emergency manager, Kevyn Orr, a former D.C. bankruptcy lawyer, was unable to forge a deal with creditors.
In a letter authorizing the bankruptcy filing, Gov. Rick Snyder (R) said the consequences of laboring under extreme debt would be even worse than bankruptcy.
“I know many will see this as a low point in the city’s history,” he wrote. “If so, I think it will also be the foundation of the city’s future — a statement I cannot make in confidence absent giving the city a chance for a fresh start, without burdens of debt it cannot hope to fully pay.”
That view is widely shared, as few political leaders pushed for a bailout of the city. After news of the bankruptcy filing, the White House issued a statement saying that President Obama is following the situation and that he remains “committed to continuing our strong partnership” with Detroit.
But others warned that bankruptcy would bring pain to the city’s 9,500 employees and nearly 20,000 retirees, while plunging its financial future into uncertainty.
“A bankruptcy might be good in terms of wiping out the debt,” said Coleman A. Young II, a state senator and son of a former mayor of Detroit who served for 19 years. “But in terms of the human impact, retirees who could have their pensions gutted, citizens who will lose services . . . it is going to be painful.”
The filing begins a one- to three-month process to determine whether the city is eligible for Chapter 9 protection and who may compete for the limited settlement money that Detroit has to offer. But it could be years before the city emerges from bankruptcy.
Orr has talked about spinning off city assets, including the Coleman A. Young International Airport and the beloved Belle Isle park, to raise money. Some have mentioned the city auctioning off some of the valuable works at the Detroit Institute of Arts. But Orr has reportedly said he will not sell the art, much of which is protected by private covenants, city agreements and state laws.
It is unclear whether those barriers will stand in a municipal bankruptcy, in which a federal judge has no power to force asset sales but can refuse to approve a debt-settlement plan.
This week, the city’s two pension funds filed suit seeking to block a bankruptcy, an action that Orr’s office said indicated that negotiations outside bankruptcy court were fruitless.
The city’s bankruptcy petition far surpasses the $4.2 billion filing by Jefferson County, Ala., in 2011, which previously was the largest in the nation. That county, which includes Birmingham, is on track to emerge from court protection by the end of the year, with many bondholders forgoing interest payments and others unable to recover even the amount of money they lent the county.
Jefferson County’s bankruptcy plan cut $1.2 billion in principal payments to investors who held bonds in a defaulted sewer project, according to Bloomberg News.
Many observers consider that outcome a hopeful sign for Detroit, which they say must shed its debt to have an opportunity to recapture any part of its past glory.
“If Detroit comes out of this a decent credit risk, other municipalities are going to absolutely want to follow their lead,” said Ken Noble, a New York bankruptcy lawyer. “This is absolutely a watershed event for municipal finance. And, really, it is the only shot that Detroit really has.”
Daniel C. Miller, the city controller in fiscally pressed Harrisburg, Pa., said Detroit’s move could be a model for other distressed cities.
“I like what is happening in Detroit very much,” he said, noting that Harrisburg is not in bankruptcy but is struggling in state receivership. “People say that if a city files for bankruptcy it cannot borrow again. That is all just ridiculous talk. Guess what: In Harrisburg, we can’t get access to capital markets right now.”
Orr has said he wants to use bankruptcy to erase many of Detroit’s debts and then invest $1.25 billion in upgrading city services and infrastructure in hopes of putting the city on a path to recovery.
A former mayor suggested that the city could take a cue from two of its automakers, which were bailed out by the Obama administration and brought through bankruptcy and are now thriving — a fact that Obama frequently boasted of during his reelection campaign.
This time, there are few signs of help from Washington. But former mayor Dennis W. Archer said Detroit could still see the same kind of recovery.
“Once the city gets through this, it will be well on its way to substantial revitalization,” he said. “The stigma of bankruptcy has not prevented corporations from going on to be successful. Witness Chrysler and General Motors. The same could be said of the city of Detroit. If this works, other distressed cities will be knocking on our door and asking, ‘How did you do that?’ ”