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Why Did Detroit File For Bankruptcy

How Common Is City Bankruptcy

Expert discusses Detroit bankruptcy

In part because of state laws restricting it, municipal bankruptcy is relatively rare. According to an early 2013 analysis by Governing magazine, only 0.6 percent of eligible municipalities filed for bankruptcy from 2008-2012. That figure is even smaller if you’re looking at cases that weren’t dismissed.

While municipal bankruptcies aren’t necessarily becoming more common, the last six years have made them much more visible. The Great Recession has worsened the fiscal situation in lots of municipalities. Five out of the six biggest municipal bankruptcies in history have taken place since the financial crisis, according to data gathered by the New York Times.

Detroit Bankruptcy ‘threw Everything Into Chaos’ For Retirees

A retired widow, Debra Westbrook spends most of her time caring for her bedridden adult son.

But it’s become more challenging, she said, after the citys 2013 bankruptcy dealt a blow to her pension and health care that threw everything into chaos.

These days, the 64-year-old former Detroit water department worker said shes struggling to cover more than $1,400 in monthly costs for her son’s care, her mortgage, insurance and other bills.

“Its eating me up alive,” said Westbrook, who has seen her monthly pension drop from about $2,400 to $1,900 and is paying $788 a month for medical coverage. “Every month I’m robbing Peter to pay Paul.”

Westbrook worked for the city of Detroit for 33 years before retiring in 2010 as the city struggled with its finances.

Her son, Marvin, 32, was born premature and has endured cerebral palsy, hydrocephalus and seizure and thyroid disorders. He’s undergone numerous brain surgeries, added Westbrook, who has been a single parent since her husband was fatally shot in the city in 1989.

“God is good. He saw me through to work those 33 years,” she said. “I thought I would be OK until the bankruptcy came.”

Five years after the city’s historic Chapter 9 filing, retirees such as Westbrook say the concessions reached through Detroit’s bankruptcy continue to devastate. But those involved in the landmark case say while painful, those reductions were necessary to aid Detroit in becoming financially solvent.

‘Broken promises’

Worried about economy

Detroit Becomes Largest Us City To File For Bankruptcy

Detroit became the largest city in U.S. history to file for bankruptcy.

City of Detroit Files for Bankruptcy

July 18, 2013 — Detroit became the biggest American city to file for bankruptcy after its emergency manager filed for Chapter 9 protection on Thursday, with more than $18 billion in accrued obligations, according to Michigan’s governor.

In the filing with the U.S. Bankruptcy Court in the Eastern District of Michigan, obtained by ABC News, state-appointed emergency manager Kevyn Orr indicates that the city’s liabilities are “more than $1 billion” and its estimated number of creditors are “over 100,000.”

In meetings with debt holders last month, Orr had indicated there was a 50-50 chance the city would need to file for Chapter 9 protection as it tried to convince creditors to accept pennies on the dollar to deal with its financial problems.

If the bankruptcy filing is approved, Detroit’s assets could be liquidated to meet creditor payments.

Included in the bankruptcy filing is a four-page letter signed by Michigan Gov. Richard Snyder and dated July 18 in which he writes, “The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services.”

Snyder wrote, “The City has more than $18 billion in accrued obligations.”

He writes that a “vital point” made by Orr is that “Detroit tax rates are at their current legal limits, and that even if the city was legally able to raise taxes, its residents cannot afford to pay additional taxes.”

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What Is Detroit’s Bankruptcy Plan

Detroit’s bankruptcy plan lays out how the city expects to deal with its debts what the different classes of creditors are and who will be paid what. It’s by no means a static document currently, it’s in its seventh amended version.

Many creditors have reached agreements with Detroit reducing the city’s future obligations. The city’s retired public workers agreed last year to take pension cuts of up to 4.5 percent, plus smaller cost of living adjustments, as the Times reported. Bond insurer Syncora, which says it’s owed $333 million, will receive only 13.7 percent of that as a result of this deal, according to Bloomberg. Some of the deals involve more than money as part of the deal with FGIC, another bond insurer, the city will demolish the Joe Louis Arena, a hockey arena, and FGIC will build a hotel.

There are other elements which cover how Detroit will handle its finances going forward for example, the city may assume a lower expected return on pension investments than it had used in the past. If the city assumes too big of a return, that could cause pension shortfalls.

Martha Kopacz, the expert that bankruptcy judge Stephen Rhodes chose to testify on the plan’s feasibility, has said that the plan is workable, but barely. Speaking , she said the borrowing the city will have to do under the plan is “at the edge of what the city can be able to service in the future.” According to Crain’s, the city could take on nearly $1 billion in additional debt.

Detroit Files For Bankruptcy

Why Obama won

DETROIT Once the very symbol of American industrial might, Detroit became the biggest U.S. city to file for bankruptcy Thursday, its finances ravaged and its neighborhoods hollowed out by a long, slow decline in population and auto manufacturing.

The filing, which had been feared for months, put the city on an uncertain course that could mean laying off municipal employees, selling off assets, raising fees and scaling back basic services such as trash collection and snow plowing, which have already been slashed.

“Only one feasible path offers a way out,” Gov. Rick Snyder said in a letter approving the move.

Kevyn Orr, a bankruptcy expert hired by the state in March to stop Detroit’s fiscal free-fall, said Detroit would continue paying 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 starting 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.

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Economic And Social Fallout Of The 1967 Riots

After the riots, thousands of small businesses closed permanently or relocated to safer neighborhoods, and the affected district lay in ruins for decades.

Of the 1967 riots, politician Coleman Young, Detroit’s first black mayor, wrote in 1994:

The heaviest casualty, however, was the city. Detroit’s losses went a hell of a lot deeper than the immediate toll of lives and buildings. The riot put Detroit on the fast track to economic desolation, mugging the city and making off with incalculable value in jobs, earnings taxes, corporate taxes, retail dollars, sales taxes, mortgages, interest, property taxes, development dollars, investment dollars, tourism dollars, and plain damn money. The money was carried out in the pockets of the businesses and the people who fled as fast as they could. The white exodus from Detroit had been prodigiously steady prior to the riot, totally twenty-two thousand in 1966, but afterward, it was frantic. In 1967, with less than half the year remaining after the summer explosion, the outward population migration reached sixty-seven thousand. In 1968 the figure hit eighty-thousand, followed by forty-six thousand in 1969.

According to the economist Thomas Sowell:

However, Thomas Sugrue argues that over 20% of Detroit’s adult black population was out of work in the 1950s and 1960s, along with 30% of black youth between eighteen and twenty-four.

Economist Edward L. Glaeser believes the riots were a symptom of the city’s already downward trajectory:

Q& a: How Detroit Went Bankrupt How It Got Out And Where The City Goes From Here

The Associated PressNovember 7, 2014

DETROIT Bankruptcy Judge Steven Rhodes has approved Detroits plan to restructure $7 billion of the citys $12 billion debt load following a nearly two-month trial. But how did Detroit get to the point where it became the largest U.S. city to file for bankruptcy and what will keep the city from further fiscal irresponsibility?

QUESTION: WHY DID DETROIT FILE BANKRUPTCY?

ANSWER: The citys slide into insolvency was not swift. In fact, it took years to reach a point where bankruptcy court protection was necessary to allow Detroit to wipe out some of its debt. As the citys population dropped, so did its property and business tax base. Operating expenses, past bills, and pension and health care obligations outpaced annual revenues by millions of dollars. Much of the money Detroit had in any given year already had been earmarked for those and other bills, leaving little to pay for even adequate city services. A failed plan to pay off pension debt also compromised millions of dollars each year in casino tax revenue Detroit desperately needed.

Q: WHO WAS BEHIND THE BANKRUPTCY?

Q: WHAT HELPED CONVINCE BANKRUPTCY JUDGE STEVEN RHODES TO ACCEPT ORRS RESTRUCTURING PLAN FOR DETROIT?

Q: HOW WILL THE CITYS BANKRUPTCY HELP THE AVERAGE DETROIT RESIDENT?

Q: WHATS THE FUTURE OF CITY-OWNED ART IN THE DETROIT INSTITUTE OF ARTS?

Q: ARE THERE SAFEGUARDS TO PREVENT DETROIT FROM INCURRING SO MUCH DEBT IN FUTURE YEARS?

Q: WHAT HAPPENS TO ORR?

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Detroit Becomes Largest Us City To Enter Bankruptcy

  • Pension reductions could be part of mix
  • City could sell assets%2C including Detroit Institute of Arts property
  • Judge would like to see a draft plan by the end of the year

DETROIT The city of Detroit officially became the largest municipality in U.S. history Tuesday to enter Chapter 9 bankruptcy after a judge declared it met the specific legal criteria required to receive protection from its creditors.

The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities that have hampered Detroit from attacking pervasive blight and violent crime.

“It is indeed a momentous day,” U.S. Bankruptcy Judge Steven Rhodes said at the end of a 90-minute summary of his ruling. “We have here a judicial finding that this once-proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start. I hope that everybody associated with the city will recognize that opportunity.”

In a surprise decision Tuesday morning, Rhodes also said he will allow pension cuts in Detroit’s bankruptcy. He emphasized that he won’t necessarily agree to pension cuts in the city’s final reorganization plan unless the entire plan is fair and equitable.

“Resolving this issue now will likely expedite the resolution of this bankruptcy case,” he said.

Rhodes said he will not issue a stay on the bankruptcy, meaning the case will proceed.

Why Did Detroit Go Bankrupt

Detroit files for bankruptcy
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DETROIT The city of Detroit, which for years paid its bills with borrowed money, is the largest city in U.S. history to file for bankruptcy protection. Heres a look at how the city spiraled into financial ruin and why its in so much trouble:

WHAT HAPPENED?

For decades, Detroit paid its bills by borrowing money while struggling to provide the most basic of services for its residents. The city, which was about to default on a good chunk of its $14 billion-plus debt, now will get a second chance in a federal bankruptcy court-led restructuring. Detroits budget deficit this year alone is estimated at $380 million, and Kevin Orr, its state-appointed emergency manager, chose bankruptcy over diverting money from police, fire and other services to make debt payments. The move conserves cash so the city can operate, but it will hurt Detroits image for years. It also leaves creditors with pennies on the dollar and places in jeopardy the pension benefits of thousands of city retirees.

WHY DID IT HAPPEN?

DID THE AUTO INDUSTRYS FALL DRAG DOWN DETROIT?

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California City Bankruptcy Filings

As Pottow mentioned, Stockton is among several California cities, including San Bernardino and Vallejo, that have filed for federal bankruptcy protection while citing the soaring costs of employee benefits, including pensions, as an important reason for seeking such protection from creditors.

In response to those filings, California Attorney General Peter H. Mixon set out his states position regarding the ability of federal bankruptcy courts to preempt state law that protects benefits provided by the California Public Employees Retirement System. In a presentation to the CalPERS Board of Administration on Sept. 12, 2012, Mixon said:

  • CalPERS memberspolicemen, firefighters, and other public employees who have labored to serve the public benefit for yearshave rights which make it fair that their pension benefits are fully honored in the bankruptcy process, whereas bond insurers are presumably experts in evaluating the financial condition of municipalities and were presumably paid large fees to assume the risk of nonpayment of certain municipal debts.

Billions In Debt Detroit Tumbles Into Insolvency

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By Monica Davey and

    DETROIT Detroit, the cradle of Americas automobile industry and once the nations fourth-most-populous city, filed for bankruptcy on Thursday, the largest American city ever to take such a course.

    The decision, confirmed by officials after it trickled out in late afternoon news reports, also amounts to the largest municipal bankruptcy filing in American history in terms of debt.

    This is a difficult step, but the only viable option to address a problem that has been six decades in the making, said Gov. Rick Snyder, who authorized the move after a recommendation from the emergency financial manager he had appointed to resolve Detroits dire financial situation.

    Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.

    For Detroit, the filing came as a painful reminder of a citys rise and fall.

    Its sad, but you could see the writing on the wall, said Terence Tyson, a city worker who learned of the bankruptcy as he left his job at Detroits municipal building on Thursday evening. Like many there, he seemed to react with muted resignation and uncertainty about what lies ahead, but not surprise. This has been coming for ages.

    The worst thing we can do is ignore a problem, said Sandy K. Baruah, president of the Detroit Regional Chamber. Were finally executing a fix.

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    The Open Housing Movement

    In 1948, Shelley v. Kraemer and three other United States Supreme Court cases established that state enforcement of racially restrictive covenants were unconstitutional. This decision revitalized the advocacy for integrated neighborhoods. Suburbs around Detroit expanded dramatically as wealthy African-Americans began to move into white neighborhoods. The singular asset that many white residents held after World War II was their home, and they feared that if Black people moved in, the value of their homes would plummet. This fear was preyed upon by blockbusting real estate agents who would manipulate Whites into selling their homes for cheap prices by convincing them that African-Americans were infiltrating the neighborhood. They would even send Black children to go door to door with pamphlets that read, “Now is the best time to sell your houseĆ¢you know that.” With the means to pick up and leave, many white residents fled to the surrounding suburbs. This “white flight” took much away from the city: residents, the middle class, and tax revenues which kept up public services such as schools, police, and parks. Blockbusting agents then profited by reselling these houses at incredibly marked-up prices to African-Americans desperate to get out of the inner city.

    What More Should I Be Reading

    rememberthatdesigner: Why Did Detroit File For Bankruptcy

    There is lots of great information out there on the history behind, and the road ahead for, Detroit’s bankruptcy. Here’s a rundown of a few good resources:

    • For a more complete rundown of the Detroit bankruptcy timeline, see Detroit’s Metro Times and Free Press.
    • To see the primary documents in the Detroit bankruptcy case, including updated plans of adjustment, see the city’s bankruptcy page.
    • To read a more nuanced discussion of what a city owes its residents in a bankruptcy, see Michelle Wilde Anderson’s “The New Minimal Cities,” a Yale Law Journal article from March 2014.
    • For a more detailed look at how the city’s politics and history led to today’s bankruptcy, read the Detroit Free Press’ “How Detroit Went Broke.”

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    Why Did Detroit File For Bankruptcy

    Detroits bankruptcy is, at its core, a cash flow problem caused by its inability to bring in enough revenue to pay its bills. Detroits bankruptcy was primarily caused by a severe decline in revenue and exacerbated by complicated Wall Street deals that put its ability to pay its expenses at greater risk.

    Timeline: Detroits Road Through Bankruptcy

    2011

    : Michigan’s Public Act 4 emergency manager law takes effect, giving state-appointed overseers of financially troubled cities the power to tear up contracts and make other unilateral moves usually reserved for locally elected officials.

    : Detroit Mayor Dave Bing says the city could run out of cash by April 2012 and have a shortfall of $45 million by June 30.

    : State Treasurer Andy Dillon orders a preliminary financial review of Detroit, announces the city is in “probable financial stress” and recommends Gov. Rick Snyder send a team to review city finances.

    2012

    : Dillon gives Bing until February to submit a financial plan to avoid an emergency manager.

    : A proposed consent agreement is given to the City Council. Moody’s downgrades the city’s tax debt. A state review team declares a “severe financial emergency.”

    : The City Council votes 5-4 in favor of a consent agreement with the state. The deal also called for the creation of a nine-member Financial Advisory Board to oversee fiscal restructuring, and a project manager and chief financial officer were empowered to carry out directives. Snyder and Bing then sign the agreement.

    May: City Council members postpone action related to the consent agreement in anticipation of a lawsuit to be filed by Corporation Counsel Krystal Crittendon. She files a suit, but it eventually is dismissed.

    : The nine-member Financial Advisory Board holds its first meeting.

    : Voters repeal Public Act 4 in the general election.

    2013

    2014

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