Detroit bankruptcy
The city of Detroit, Michigan, filed for Chapter 9 bankruptcy on July 18, 2013. It is the largest municipal bankruptcy filing in U.S. history by debt, estimated at $18–20 billion, exceeding Jefferson County, Alabama's $4-billion filing in 2011.[1] Detroit is also the largest city by population in U.S. history to file for Chapter 9 bankruptcy, more than twice as large as Stockton, California, which filed in 2012. While Detroit's population had declined from a peak of 1.8 million in 1950, its July 2013 population was reported by The New York Times as a city of 700,000. [1]
Detroit's bankruptcy filing followed a declaration of financial emergency in March 2013 that resulted in Kevyn Orr being appointed as "emergency manager" of the city by Michigan Governor Rick Snyder. Orr's subsequent negotiations sought to get creditors to willingly agree to debt restructuring and accept less than initially agreed on Detroit's debt, and were ultimately unsuccessful.[2][3]
On July 19, 2013, Judge Rosemarie Aquilina of the Thirtieth Judicial Circuit Court of Michigan ruled the bankruptcy filing by Detroit violated Article IX, Section 24, of the Michigan Constitution and ordered Governor Rick Snyder to withdraw the filing immediately.[4] On July 23, an appeals court stayed the circuit court ruling pending future rulings on Michigan Attorney General Bill Schuette's appeal.[5][6] On July 24, the Bankruptcy Court added its own, federal stay of the state court proceedings.[7] On August 2, the bankruptcy court set a hearing date of October 23, 2013, for trial on any objections to the city's eligibility for Chapter 9 bankruptcy, and March 1, 2014, as the deadline for the city to file a bankruptcy plan.[8] After a nine-day trial on eligibility, the Bankruptcy Court on December 3, 2013, ruled Detroit eligible for Chapter 9 on its $18.5 billion debt.[9] On June 3, 2014 the Michigan Legislature passed a package of bills to help Detroit avoid further bankruptcy proceedings.[10] On the same day, Governor Snyder pledged to sign the package of bills.[10]
After a two-month trial, Judge Steven W. Rhodes confirmed the city's plan of adjustment on November 7, 2014, paving the way for Detroit to exit bankruptcy.[11] Creditors and insurers were expected to absorb losses totaling $7 billion, with creditors receiving between 14 and 75 cents on the dollar.[12][13]
Reaction[edit]
Yields on bonds issued by the city of Detroit increased on July 18 to record highs, as investors considered the potential effects of the bankruptcy filing. Rates had already escalated when yields jumped from 8.39% in mid-May to 16% in mid-June 2013.[33] The credit rating agency Moody's said that the bankruptcy filing was credit negative for Detroit and that it created an "unprecedented litigation scenario," which could impact services city residents receive, as well as how much bondholders would recover from Detroit.[37]
Business and labor leaders reacted to the filing. Detroit union leaders called Orr's move to declare bankruptcy premature due to ongoing financial negotiations with creditors, unions, and pension boards,[25] but also stated that employees will continue to work in a typical fashion.[38] The only major U.S. automaker headquartered in Detroit itself, General Motors, said it "is proud to call Detroit home and ... (this is) a day that we and others hoped would not come. We believe, however, that today also can mark a clean start for the city."[33]
Politicians have commented on the bankruptcy. Bing said that the people of Detroit "have to make the best of it".[25] Snyder stated that "I know many will see this as a low point in the city’s history," "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."[16] President Barack Obama said that he is following the developments and that he is "committed to continuing our strong partnership" with Detroit.[16] Kentucky Senator Rand Paul stated that he will not allow the government to bail out the city, saying "He is bailing them out over my dead body, because we don’t have any money in Washington."[39] Snyder also stated that he did not support a government bail out. "It's not just about putting more money in a situation," he said. "It's about better services to citizens again. It's about accountable government."[40]
Detroit's debts included $369 million in unlimited general obligation bonds, bonds issued with the general backing of taxpayers, described by Florida bond finance director Ben Watkins as "[having] been the gold standard of the municipal-bond market". The offer by Kevyn Orr to settle these for less than 20% face value, and doubts regarding the willingness of Michigan to assume the debts, was predicted to drive up borrowing costs of nearby municipalities.[41] This effect has been seen in regard to localities in Michigan. Three have so far had to postpone new bond offerings or face higher interest rates.[42] However, this concern has not materialized on a wider scale, as investors have actually treated municipal general obligation bonds as safer than before the filing. Recent history from California "has shown that the fallout from a bankruptcy can dissipate quickly" in the bond market. Contributing to this is the fact that Moody's has fewer than 40 of the 7,500 local governments that it rates listed as below investment grade.[43]
Soon after Detroit declared bankruptcy, it was reported that the city would continue with plans for a bond issue to fund a new $444 million arena for the Detroit Red Wings. Repayment of the bonds would be split between taxpayers and developers of the arena. Both Snyder and Orr acknowledged concerns raised about the expense, but stated that continuing the project makes good economic sense even with the context of Detroit's bankruptcy. With the arena, and additional retail, office, residential and hotel space the developer has committed to build as part of the overall project, it is expected to create about 8,000 construction jobs, with work due to start in 2014.[44]
Detroit after bankruptcy[edit]
In the years following the bankruptcy filing in 2013 and subsequent bargaining, there has been major private investment and development in Detroit, including in the downtown, Midtown, riverfront, Corktown, and New Center areas.[90] Many development projects have received government subsidies or tax breaks from the city.[91]
While development has increased, Detroit continues to face financial problems as well as continued housing foreclosures and unemployment, particularly in the area of the city outside of the 7.2 square miles in the center of the city where development is occurring.[91] Housing foreclosures persisted after the bankruptcy, with a 30% tax delinquency rate in 2015.[21] Provision of city services are also a problem due to old infrastructure, low tax revenue, and a smaller population spread across the city area.[21] Still, it has been less than a decade since Detroit emerged from bankruptcy on paper, and many of these problems have roots beyond the bankruptcy. A Forbes article published in 2018 notes that “Detroit has yet to witness the full economic impact of its resurgence,” predicting an additional five to ten years of rebuilding.[90]
Further challenges also emerged. During the COVID-19 pandemic, loss of city revenue from casinos and unemployment created another budget deficit.[92] In addition to layoffs of city employees and reductions in hours and wages, Mayor Mike Duggan has cut funding used to destroy blighted and vacant buildings around the city to prevent the deficit from reaching the 5% city revenue threshold for another state intervention in city finances.[92]