The Detroit bankruptcy filing, which follows a decades-long decline in city finances that led to $18 billion in debt, sets the stage for a showdown with 43 public sector unions facing a drastic cut in pensions.
Detroit emergency manager Kevyn Orr (l.) speaks at a March 2013 news conference in Detroit as Michigan Gov. Rick Snyder, who appointed Orr, listens. On Thursday, July 18, Detroit became the largest city in U.S. history to file for bankruptcy when Orr asked a federal judge for municipal bankruptcy protection.
Paul Sancya/AP/File
EnlargeDetroit filed for bankruptcy Thursday, the largest municipal bankruptcy case in US history. The move followed a state-led intervention to revive the city?s finances, which had been failing for decades.
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The historic filing is ?recognition [Detroit] hit bottom, and it?s an opportunity to get a roadmap back to restructure itself and become [a city] that has a chance to right-size itself,? says Douglas Bernstein, a managing partner of Plunkett Cooney, a law firm in Bloomfield Hills, Mich. that specializes in bankruptcy law.
?That?s not to say it will be simple and not without pain,? he says, ?but it?s recognition that things have to change.?
Among the reasons for the bankruptcy: systemic population loss, including from residential flight; high unemployment; a sharp decline in real estate values; and chronic corruption and mismanagement.
Gov. Rick Snyder authorized the petition, which was filed late Thursday afternoon in US Bankruptcy Court in Detroit. A press conference is scheduled for 10 a.m. EST Friday.
?This was a difficult decision, but clearly the right decision in my view because we have no viable alternative,? Governor Snyder, a Republican, told reporters in a brief teleconference late Thursday. ?We have a great city, but a city that?s been going downhill for the last 60 years. This is an opportunity to say enough is enough.?
Snyder described the city?s $18 billion in debt and unfunded liabilities as ?unsustainable,? saying that 38 cents of every dollar of city income is going toward debt repayment, legacy costs, and other obligations.
The slow march leading to this decision started in March when Snyder named Kevyn Orr, a restructuring specialist and University of Michigan graduate who represented Chrysler during its 2009 bankruptcy, as the Motor City?s emergency financial manager. Snyder said he received Mr. Orr?s recommendation to file for Chapter 9 bankruptcy on Tuesday.
Over the last few months, Orr negotiated with Detroit?s creditors to try and reduce the city?s debt, $5.7 billion of which is related to health-care costs for retirees. To date, he was only able to win commitments from two parties, Bank of America Corp. and UBS AG. Both banks agreed to accept 75 cents on the dollar, according to a report in the Detroit News.
While Snyder says he expects the restructuring to take place in a year, bankruptcy experts say it will take much longer due to the unprecedented and complex nature of the case.
?Chapter 9 broadly defines municipalities, but you have very few instances where you have had a true city file, which makes proceeding under this chapter somewhat unpredictable. There?s not much in the way of case law that gives guidance. So [the state] must not jump in blindly,? Mr. Bernstein says.
The Chapter 9 filing sets the stage for a legal showdown between the state and the 43 public sector unions operating in the city that say their pensions are protected under the state constitution, even though a federal bankruptcy judge has the authority to slash those benefits and invalidate union contracts.
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