Detroit is the officially the largest city in U.S. history to ever claim bankruptcy. After surviving for years on borrowed money, the city now owes in excess of $18 billion. Kevyn Orr, the state-appointed city manager, filed plans for the city’s bankruptcy on Friday. Relieving the city’s debt could be the first step in rebuilding Detroit.
Details of the bankruptcy plan are still under negations, but there is a plan to prevent the sale of the Detroit Institute of Arts (DIA,) as well as a plan to put the Water and Sewage Department under the responsibility of a regional authority. Both items have posed issues thus far because the DIA owns pieces of value and the water and sewage is a huge financial burden on the city.
Orr put the plan in motion when he filed the plans to rid the city of the enormous debt. The cutbacks involved cutting pensions of Detroit’s retirees. Cost of living expenses would be cut for retired police and firefighters, meaning that they would get 90 percent of their pension, while others could receive as little as 70 percent. Furthermore, creditors may only be able to collect 20 percent of the money the city owes them.
Trouble in the auto industry, from which the city was originally built upon,posed many of the financial woes. Corruption in government leaders, including former mayor, Kwame Killpatrick, has also worsened the financial standing of the city.
The only other place of this size to claim bankruptcy was Jefferson County, AL. Since they claimed $4 billion in the bankruptcy in November 2011, they have emerged from it, but not without causing the surrounding cities to crumble. Those cities also ended up claiming bankruptcy.
Detroit filed for bankruptcy on July 18, 2013. U.S. Bankruptcy Judge Stephen Rhodes, who is presiding over the case, set a March 1 deadline for these plans. The 120-page document, if accepted, is expected to receive appeals. Court documents show that the city owes banks, unions, city workers, businesses and others for money borrowed. In fact, it has over 100,000 creditors, which is the main reason Rhodes approved the city as eligible for claiming bankruptcy.
Orr, appointed in March 2013, released a financial health statement in May, 2013 that showed a $162 million shortfall, as far as cash flow was concerned. He claimed that one-third of the budget was being used to pay benefits to retirees. Since then, he has participated in court-mandated mediation and he is happy with the decisions they have come to. He said there is a lot left to do to recover from the “decades-long downward spiral.”
Michigan Gov. Rick Snyder said that the plan submitted by Orr is “thoughtful” and “comprehensive.” While It was not Snyder’s idea to initiate bankruptcy in Detroit, he believed the necessary steps are being taken to create growth and stability for the city. In addition to removing the city’s debt, as laid out by the plans filed for bankruptcy, Orr also included a 10-year plan to improve city services. Ridding the city of its blight, bringing new business to the city and improving safety is expected to help Detroit flourish once again. Federal bankruptcy is giving Detroit a second chance.
By Tracy Rose