The City Of Detroit, Michigan, Filed For Chapter 9 Bankruptcy Protection, Becoming The Largest Municipal Bankruptcy Filing In United States History. The Filing Marked A Climactic Moment In The Long-Term Economic Decline Of One Of America's Most Iconic Industrial Cities. Once A Global Center For Automobile Manufacturing And Innovation, Detroit Had Experienced Decades Of Population Loss, Revenue Shortfalls, Rising Debt Obligations, And Service Failures That Culminated In A Fiscal Crisis With National Implications.
Detroit's Bankruptcy Filing Was Submitted By Emergency Manager Kevyn Orr, Who Had Been Appointed By Michigan Governor Rick Snyder In March 2013 To Oversee The City's Finances. Orr Filed The Petition In The U.S. Bankruptcy Court For The Eastern District Of Michigan, Citing Over $18 Billion In Debt And Unfunded Liabilities. The Filing Halted All Creditor Lawsuits And Triggered A Legal Process Intended To Reorganize The City's Finances While Maintaining Basic Services For Residents. At The Time Of The Filing, Detroit's Creditors Included Bondholders, Pension Funds, Vendors, And Insurance Companies, All Seeking A Share Of The City’s Limited Resources.
The Economic Decline Of Detroit Was Rooted In Several Interconnected Factors. The City's Population Had Fallen From A Peak Of 1.85 Million In 1950 To Just Over 700,000 By 2013. This Sharp Decline Drastically Reduced The Tax Base And Increased The Per Capita Burden Of Public Services. The Collapse Of The U.S. Auto Industry During The 2008 Financial Crisis Further Accelerated The City's Fiscal Deterioration. Despite Federal Aid To General Motors And Chrysler, Detroit Did Not Receive A Direct Municipal Bailout.
By 2013, Basic Public Services In Detroit Had Reached Critically Low Levels. Police Response Times Averaged Nearly One Hour. Approximately 40 Percent Of The City’s Streetlights Were Not Functioning. Nearly One-Third Of The City’s 140 Square Miles Were Vacant Or Blighted. In Addition, The City Faced Legal Challenges From Retirees And Labor Unions Concerned About Cuts To Pensions And Health Benefits. The Chapter 9 Filing Allowed Detroit To Negotiate Adjustments To These Obligations Under Federal Supervision, Though Not Without Controversy.
One Of The Pivotal Legal Questions In The Case Was Whether Public Pensions, Protected By The Michigan Constitution, Could Be Reduced In Federal Bankruptcy Court. In December 2013, Judge Steven Rhodes Ruled That Federal Bankruptcy Law Preempted State Law In This Case And That Pension Obligations Could Be Adjusted. This Ruling Set A Legal Precedent That Affected Public-Sector Unions And Municipal Bond Markets Across The United States.
Over The Next Seventeen Months, The City Negotiated A Plan Of Adjustment That Included Reductions In Payments To Creditors, Restructuring Of Municipal Services, And A Landmark Agreement Known As The “Grand Bargain.” The Grand Bargain Involved Contributions From The State Of Michigan, Private Foundations, And The Detroit Institute Of Arts, Which Together Raised Over $800 Million To Protect City-Owned Art From Liquidation And To Reduce Pension Cuts. This Agreement Was Seen As A Unique Model Of Public-Private Cooperation In Resolving A Municipal Bankruptcy.
In November 2014, Judge Rhodes Approved The City’s Plan Of Adjustment, Allowing Detroit To Exit Bankruptcy. The Final Deal Eliminated About $7 Billion In Debt And Freed Up Hundreds Of Millions Of Dollars For Reinvestment In Services Such As Street Maintenance, Public Safety, And Technology. Though The Bankruptcy Did Not Resolve All Structural Issues, It Marked A Turning Point In Detroit’s Financial History And Offered A Path Toward Stabilization.
The Long-Term Effects Of The Bankruptcy Continue To Be Studied. Credit Ratings Agencies Monitored The Outcome Closely, And Other Struggling Cities Examined Detroit's Experience For Lessons. While The City Remains Under Oversight Of A Financial Review Commission, The Bankruptcy Allowed It To Reorient Its Budget, Improve Service Delivery, And Rebuild Institutional Credibility. The 2013 Bankruptcy Filing, Though Traumatic, Served As A Legal And Financial Mechanism That Addressed Decades Of Economic Decline Through A Federally Supervised Process.
References / More Knowledge:
Detroit Free Press. (2013, July 18). Detroit Files for Bankruptcy. Retrieved from https://www.freep.com
U.S. Bankruptcy Court, Eastern District Of Michigan. (2013). In re City of Detroit, Michigan, Debtor, Case No. 13-53846.
Rhodes, S. W. (2013). Opinion Regarding Eligibility and Pension Impairment. U.S. Bankruptcy Court, Eastern District of Michigan.
Reuters. (2013, July 18). Detroit Files For Largest Municipal Bankruptcy in U.S. History. Retrieved from https://www.reuters.com
The New York Times. (2014, November 7). Detroit’s Bankruptcy Exit Approved by Judge. Retrieved from https://www.nytimes.com
Pew Charitable Trusts. (2015). The State Role in Local Government Financial Distress. Retrieved from https://www.pewtrusts.org