Monday, July 22, 2013

How Does a Major City Go Bankrupt?

I've always thought of big cities like New York, Los Angeles, and Atlanta as colossal, self sustaining, behemoths that were too big to fail. But they are far from impregnable, and not exempt from struggle.

Detroit filed the largest municipal bankruptcy in the nation’s history Thursday, marking a new low in a long decline that has left the U.S. automaking capital bleeding residents and revenue while rendering city services a mess.

The city, which was the nation’s fourth-largest in the 1950s, with nearly 2 million inhabitants, has seen its population plummet to 700,000 as residents fled rising crime and deteriorating basic services, taking their tax dollars with them.

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. The fact 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 after the 1967 race riots which were among the most violent in the country’s history, helped accelerate the cities rapid decline. 

But to blame the implosion and deterioration on the residents of Detroit would be doing them a grave injustice. Especially given the fact that the auto industry abandoned the city for low cost manufacturing in other countries like China and Brazil. Auto makers like General Motors who effectively fueled thriving middle class communities by paying high wages which created an economic boom, fled Detroit, taking the jobs right along with them. Thus crushing the middle class and sending the city into a tailspin from which it has never recovered.

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. 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 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.


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