19 Jul 2013

Detroit files for bankruptcy – so what happens next?

“Let me be blunt: Detroit is broke.” Michigan’s governor says the city has gone bankrupt after 60 years of decline. But can the city that was once a symbol of industrial might bounce back?

detroit skyline (getty)

It has taken six decades of neglect to reach this point: the story of Detroit is one of financial mismanagement, of questionable investments, of industrial decline and the flight of the white middle-class population, first to the suburbs, and then beyond.

Now Detroit, the city that fuelled America’s love affair with the car, is sinking under the weight of $20bn of debt. It has had no alternative but to take the drastic step of filing for Chapter 9 bankruptcy. What happens next is in the hands of the courts.

Michigan’s Republican governor Rick Snyder called it a difficult step, but a necessary one: “A last resort to return this great city to financial and civic health for its residents and taxpayers. This decision comes in the wake of 60 years of decline… a period in which reality was often ignored.”

Immediate pain

So what does this mean? Kevyn Orr was appointed by the state in March as the city’s emergency manager. A turnaround expert, it is his job to come up with a recovery plan and start repaying what the city owes.

This does not mean the entire city will grind to a halt. The fire department, police, water and sewage services will keep operating, much to the relief of residents, although cuts could be a possibility in future.

But it will mean immediate financial pain for more than 55,000 creditors, many of whom will see only a fraction of what they are owed.

Let me be blunt. Detroit is broke. Michigan governor Rick Snyder

If creditors and the bankruptcy court do approve a restructuring plan, the city will be allowed to start afresh: this is likely to mean lay-offs, budget cuts, and a sale of city assets – although Kevyn Orr abandoned an idea to sell off works from Detroit’s Institute of Art after it provoked an immediate outcry.

But the city is limited in what it can do. Aside from the police and fire departments, the biggest drain on its resources is the cost of pensions for tens of thousands of retired city employees. Indeed, the number of retirees now far outnumbers the current municipal workforce.

The pensions black hole has soared to $3.5bn after years of poor management and questionable investments were compounded by the financial crisis. Detroit had struggled to meet its pension needs since the 1950s, and the recession in the car industry proved the last straw.

Pensions fight

Now lawyers representing those retired employees say they will fight in the courts to make sure no-one loses their entitlements, although experts have warned that benefits are likely to be reduced. Unions say that would be outlawed by the state’s constitution.

At the moment, city workers are being sent letters telling them that work continues as usual, while special helplines will be set up to answer questions and concerns from local residents.

The pension fund fiasco mirrors the city’s own slide into disrepair: once the fifth biggest city in the United States, its population has shrunk from 1.8m in 1950 to just over 700,000 today.

The rise of suburban living lured white, middle-class families away from the urban centre, accelerated by serious disorder and riots in 1967: property values plummeted, and along with them, tax revenues.

The demise of the car industry pushed unemployment levels sky high. Detroit became a byword for deprivation, while the rate of violent crime and homicide soared too.

Litany of despair

Today’s statistics, revealed by Governor Snyder, read like a litany of despair. The unemployment rate has tripled since 2000 and now stands at twice the national average. With the murder rate at an historic high, Detroit has numbered among America’s most dangerous cities for more than 20 years.

The worst thing we can do is ignore a problem. We’re finally executing a fix. Sandy Baruah, Detroit Regional Chamber

Call police for help, and you will wait, on average, just short of an hour for a response. The national average is just 11 minutes.

There are 78,000 buildings abandoned, while 40 per cent of the street lights do not work. This is literally a city which is living in the darkness of its own neglect and disrepair.

Detroit, of course, is not the only US city to file for Chapter 9 bankruptcy: more than 60 towns, cities and villages have done the same. But its size, and the size of its debts and liabilities, make this an unprecendented case.

From Motor City to Motown city to this desperate state of affairs: perhaps Detroit can make this a fresh start, draw a line under the mismanagement and bad decision making of the past.

“The worst thing we can do is ignore a problem,” the president of Detroit’s regional chamber, Sandy Baruah, told the New York Times. “We’re finally executing a fix”.

Urban renewal?

There are some signs of hope: new initiatives like the urban farming project have turned derelict and vacant land into thriving plots, growing everything from food to flowers, transforming whole neighbourhoods and rebuilding houses on the verge of being pulled down.

And there has been some success in attracting young internet businesses into the downtown area, which has helped bring some new life, and resources, into the city centre.

The White House said it was keeping a close eye on developments. “We remain committed to continuing our strong partnership with Detroit, as it works to recover and revitalise and maintain its status as one of America’s great cities,” said spokeswoman Amy Brundage.

Vice-president Joe Biden told reporters that officials had been briefed but couldn’t say whether the administration could step in to help. “Can we help Detroit? We don’t know”, he said.

And in the meantime, the financial future of Detroit is in the hands of the bankruptcy court.

Felicity Spector writes about US affairs for Channel 4 News