Long-Suffering Detroit Finally Turns to Bankruptcy

(Image 1)

DETROIT (AP)
— At the height of its industrial power, Detroit was an irrepressible
engine of the American economy, offering well-paying jobs, a gateway to
the middle class for generations of autoworkers and affordable vehicles
that put the world on wheels.

But by Thursday,
the once-mighty symbol of the nation's manufacturing strength had
fallen into financial ruin, becoming the biggest U.S. city ever to file
for bankruptcy – the result of a long, slow decline in population and
auto manufacturing.

Although the filing had
been feared for months, the path that lay ahead was still uncertain.
Bankruptcy could mean laying off employees, selling off assets, raising
fees and scaling back basic services such as trash collection and snow
plowing, which have already been slashed.

Kevin Frederick, an admissions representative for a local career training school, called the step “an embarrassment.”

“I guess we have to take a couple of steps backward to move forward,” Frederick said.

Now city and state leaders must confront the challenge of rebuilding Detroit's broken budget in as little as a year.

Kevyn
Orr, a bankruptcy expert hired by the state in March to stop Detroit's
fiscal free-fall, said Detroit would continue to pay its bills and
employees.

But, said Michael Sweet, a
bankruptcy attorney in Fox-Rothschild's San Francisco office, “they
don't have to pay anyone they don't want to. And no one can sue them.”

The
city's woes have piled up for generations. In the 1950s, its population
grew to 1.8 million people, many of whom were lured by plentiful,
well-paying auto jobs. Later that decade, Detroit began to decline as
developers started building suburbs that lured away workers and
businesses.

Then beginning in the late 1960s,
auto companies began opening plants in other cities. Property values and
tax revenue fell, and police couldn't control crime. In later years,
the rise of autos imported from Japan started to cut the size of the
U.S. auto industry.

By the time the auto
industry melted down in 2009, only a few factories from GM and Chrysler
were left. GM is the only one with headquarters in Detroit, though it
has huge research and testing centers with thousands of jobs outside the
city.

Detroit lost a quarter-million residents between 2000 and 2010. Today, the population struggles to stay above 700,000.

The
result is a metropolis where whole neighborhoods are practically
deserted and basic services cut off in places. Looming over the
crumbling landscape is a budget deficit believed to be more than $380
million and long-term debt that could be as much as $20 billion.

In recent months, the city has relied on state-backed bond money to meet payroll for its 10,000 employees.

Orr made the filing in federal bankruptcy court under Chapter 9, the bankruptcy system for cities and counties.

He
was unable to persuade a host of creditors, unions and pension boards
to take pennies on the dollar to help with the city's massive financial
restructuring. If the bankruptcy filing is approved, city assets could
be liquidated to satisfy demands for payment.

Two
public employee pension systems are the top unsecured creditors,
according to bankruptcy documents. The city General Retirement System's
claim is just more than $2 billion. The Police and Fire Retirement
System is owed more than $1.4 billion. The documents filed also show
more than 100,000 creditors that include individual retirees, city
workers, banks, other businesses, property owners and litigants, though
amounts owed aren't listed.

Orr said Thursday
that he “bent over backward” to work with creditors, rejecting criticism
that he was too rigid. “Anybody who takes that position just hasn't
been listening.”

The bankruptcy could last through summer or fall 2014, which coincides with the end of Orr's 18-month appointment, he said.

Gov.
Rick Snyder, who called bankruptcy the “one feasible path,” determined
earlier this year that Detroit was in a financial emergency and without a
plan for improvement. He made it the largest U.S. city to fall under
state oversight when a state loan board hired Orr.

Creditors
and public servants “deserve to know what promises the city can and
will keep,” Snyder wrote in a letter that was part of the filing. “The
only way to do those things is to radically restructure the city and
allow it to reinvent itself without the burden of impossible
obligations.”

A turnaround specialist, Orr
represented automaker Chrysler LLC during its successful restructuring.
He issued a warning early on in his tenure in Detroit that bankruptcy
was a road he preferred to avoid.

Some city
workers and retirement systems filed lawsuits to prevent Snyder from
approving Orr's bankruptcy request, said Detroit-area turnaround
specialist James McTevia.

They have argued that bankruptcy could change pension and retiree benefits, which are guaranteed under state law.

Others
are concerned that a bankrupt Detroit will cause businesses large and
small to reconsider their operations in the city. But General Motors
does not anticipate any impact to its daily operations, the automaker
said Thursday in a statement.

Detroit has more
than double the population of the Northern California community of
Stockton, Calif., which until Detroit had been the largest U.S. city
ever to file for bankruptcy when it did so in June 2012.

Before
Detroit, the largest municipal bankruptcy filing had involved Jefferson
County, Ala., which was more than $4 billion in debt when it filed in
2011. Another recent city to have filed for bankruptcy was San
Bernardino, Calif., which took that route in August 2012 after learning
it had a $46 million deficit.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Learn more about our Privacy Policy and Terms of Use.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s