Detroit Becomes Largest US City To File For Bankruptcy
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Detriot, once a symbol of U.S. industrial power, has become the largest U.S. city to file for bankruptcy, laying the groundwork for a historic effort to bailout a city that is sinking under billions of dollars in debt and decades of fiscal mismanagement, population exodus and loss of tax revenue.
Detriot, once a symbol of U.S. industrial power, has become the largest U.S. city to file for bankruptcy, laying the groundwork for a historic effort to bailout a city that is sinking under billions of dollars in debt and decades of fiscal mismanagement, population exodus and loss of tax revenue.
“This decision comes in the wake of 60 years of decline in the city, a period in which reality was often ignored. I know that many will see this as a low point in the city’s history. If so, I think it will also be the foundation of the city’s future,” said Michigan Governor Rick Snyder, who authorised the bankruptcy filing after a recommendation from Emergency Manager Kevyn Orr.
“This is a difficult step, but the only viable option to address a problem that has been six decades in the making,” he added. “Detroit simply cannot raise enough revenue to meet its current obligations, and that is a situation that is only projected to get worse absent a bankruptcy filing.”
The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities. If the petition is approved, Detroit would be allowed to liquidate city assets to satisfy its creditors as well as other broad powers to impose draconian cost cutting measures.
Saddled by junk status from credit-rating firms, Detroit has had its ability to borrow almost completely shut off and reached its statutory limit to tax its residents to raise new revenue, state officials said. Orr had called the city functionally insolvent, and it recently missed a payment to the city’s pension system of nearly $40 million.
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In the 1950s, Detroit, known worldwide as the Motor City, had one of the highest per capita incomes in the U.S. when auto plants were hiring wholesale. Today, Detroit is a poster child for urban failure.
Its financial troubles began when key auto factories were automated or outsourced, and Asian competitors slowly siphoned away its global market share. At the same time, its population has shrunk from a peak of 2 million in the 1950s to 700,000 today.
Racial tensions sparked by the civil rights movement – and the devastating 1967 riots – exacerbated white and middle-class flight to the suburbs. Businesses followed suit, further shrinking the tax base. With less revenue, Detroit had to cut back on services, prompting even more people to leave and eventually sending the city into an economic tailspin.
On Thursday, Governor Snyder said Detroit is unable to meet its most basic obligations to its residents, let alone its creditors.
[quote] According to a city report, about 40 percent of the city’s street lights are shut off and more than half of its parks have closed since 2008. There are approximately 78,000 abandoned buildings in the city. The unemployment rate has nearly tripled since 2000 and the homicide rate was at its highest level in 40 years. Meanwhile, 60 percent of Detroit’s children live in poverty. [/quote]Related: Rich Nations, Poor People: The Cause For Rising Poverty In The Western World
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“The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services,” Snyder wrote. “The only way to do those things is to radically restructure the city and allow it to reinvent itself without the burden of impossible obligations.”
Analysts say there are some concerns that businesses might ditch their operations in Detroit. But, in the wake of the filing, General Motors said it did not expect any impact on its operations, and hoped it would mark a “clean start” for Detroit. “GM is proud to call Detroit home and today’s bankruptcy declaration is a day that we and others hoped would not come,” the company said.
Other major cities have teetered on the edge of bankruptcy, including New York in 1975, Cleveland in 1978 and Philadelphia in 1991. But all brokered deals rather than face the dire consequences of going bust.
Detroit is only the latest U.S. city to file for bankruptcy in recent years. In 2012, three California cities – Stockton, Mammoth Lakes and San Bernardino – took the step.
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