Detroit Files For Bankruptcy Photo:
Mike Stevens | Jul, 19 2013 | 8 Comments

The American auto industry has clawed its way back from the brink, recovering from the global financial crisis with tough decisions and more than a little government assistance.

But Detroit, the spiritual home of the industry, the 'Motor City', has not fared so well. Today it announced that it has filed for Chapter 9 bankruptcy protection; it isn't the first city to declare itself bankrupt, but it is the largest.

It's a day that has been a long time coming.

Detroit's Chapter 9 filing is the result of years of mismanagement and accumulated debt. (Under US law, Chapter 9 bankruptcy-protection is specifically for municipalities; Chapter 11 for companies. For each, it allows protection while they negotiate a plan to address debt obligations.)

The city is broke, its infrastructure is failing, home values have plummeted, crime has risen in the face of a stretched and overworked police force, and its former mayor is in prison for corruption.

Once among the largest cities in the US with 1.8 million residents in 1950, the Michigan city's troubles have seen its population dwindle to just over 700,000.

With a falling population and streets of collapsed business, its tax base, and the city's income, has also fallen.

“I authorize this necessary step as a last resort to return this great city to financial and civic health for its residents and taxpayers,” Michigan Governor Rick Snyder, a Republican, said in a letter today authorising Mr Kevyn Orr, the city’s emergency manager, to file the petition.

But, like GM managed to do under its Chapter 11 protection, this step will allow Detroit to consolidate, to renegotiate old debts and burdens, and focus on returning the city to prosperity.

In its filing, the city listed more than US$1 billion in assets, but with debt stretching to more than US$17 billion when including long-term obligations.

Under the US Federal Bankruptcy Code, Chapter 9 protection means that the city cannot be forced by creditors (or a court) to liquidate its assets. It also allows municipalities to manage their own spending during bankruptcy.

Mr Orr has proposed a debt restructuring that includes layoffs, cutting pension and health payments for public employees - including 18,500 retirees - and cutting pay increases normally aligned with cost-of-living changes.

The city has already had to borrow cash from its own service funds, taking money from waste, street and risk management funds. At the end of June, the city had taken more than US$60 million from retirement funds.

“Without a significant restructuring of its debt, the city will be unable to break the cycle of damaging cutbacks in essential municipal services and investments,” Mr Orr said.

In a letter today, GM said that Detroit's bankruptcy filing, like its own time in reorganisation, can only help the city in the long term.

"GM is proud to call Detroit home and today's bankruptcy declaration is a day that we and others hoped would not come," the carmaker said. "We believe, however, that today also can mark a clean start for the city.

"We hope that all parties recognise the sacrifices to follow can help rebuild a stronger Detroit with a level of services and quality of life its citizens deserve. A healthy auto industry will play a part in Detroit's comeback story and GM is doing its part."

GM, again a profitable company, can speak from experience.

Links contained in this article
TMR Comments
Latest Comments