Detroit bankruptcy: A long time coming?

A still image of Downtown Detroit in the evening.

Detroit’s worn many titles. Motor City. Motown. Today, it added another: Largest municipal bankruptcy filing in U.S. history. Detroit’s emergency manager Kevyn Orr wasn’t able to get enough buy-in from stakeholders for his plan to restructure almost $20 billion in long term liabilities.

"Detroit’s problems have been building for some time. It’s lost a quarter of its population in the last decade. It’s insolvent; it can’t pay its debts," Daniel Howes, the business columnist at the Detroit News, told Marketplace. "And the situation is getting worse. Citizens wait 58 minutes to wait for a cop to respond to a call."

"[The bankruptcy filing] is going to set a lot of precedent around the country," Howes adds.

To hear the full interview, click on the audio player above.

Up until now, it seemed like Detroit was always on deadline to deliver a financial rescue plan …. or else. Now that it’s filed for Chapter 9 bankruptcy protection, the first thing it gets is:

"Breathing room," says Paul Maco, a partner at law firm Bracewell & Guiliani. "It gives them a chance to work out over an extended period of time problems that may be immediately confronting them."

One problem that’s likely to continue in bankruptcy is the inherent tension between bondholders, people who buy municipal debt, and pensioners, retired public employees. Municipal bankruptcies are rare, but they can pit the two against each other in a scramble for what little funds remain.


Pulitzer Prize-winning journalist Charlie LeDuff was raised in Detroit. He left it, wrote for the New York Times, and then he went back home. Host Kai Ryssdal spoke with LeDuff about his book, "Detroit: An American Autopsy," the city itself and the journalistic tendency to engage in "ruin porn." Read and listen to that interview now.

Eric Scorsone is an economist with Michigan State University. He says bond holders are usually repaid through insurance or bankruptcy agreements themselves. Public pensioners don’t have that edge.

“Public pensioners are not protected by the federal employee guarantee fund,” he says. “There’s nothing in the state of Michigan that’s anything similar to that. So really there are no protections.”

In other words, there’s no insurance for retirees facing massive modification of the pensions Detroit once promised.

Before Central Falls, Rhode Island went into bankruptcy, that state passed a law granting bond holders priority over other creditors. That’s unusual, but it shows how eager states and cities are to protect their credibility in the municipal bond market. Jim Spiotto is a partner at Chapman and Cutler.

They said they wanted to make sure that their municipalities, all of their municipalities, would have access to the market. And the market would perceive that if they lend credit to their municipalities, they will be paid,” he says.

However the pensioner/bondholder tension plays out, there’s a larger issue in Detroit. Surviving bankruptcy does no good without a viable recovery plan on the other side. Which brings us to the question of assets.

There’s been a lot of talk about whether Detroit will have to sell off city assets. Like an airport. Or beautiful Belle Isle Park. Or perhaps a prized Rembrandt from the Detroit Institute of Arts. Eric Scorsone says that’s not something a judge can order.

“Unlike a corporate bankruptcy, the creditors cannot force the sale of assets,” he says. “And so, it’s really gonna be on the city to decide strategically what assets are needed and what assets could be sold for cash.”

Scorsone says the art institute is important for economic vibrancy down the road. But maybe the city would sell the Windsor Tunnel, connecting Detroit to Canada. It’s been proposed before.

About the author

Kate Davidson is a regular contributor to Marketplace.

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