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?’ ”