The Student News Site of DePaul University

The DePaulia

The Student News Site of DePaul University

The DePaulia

The Student News Site of DePaul University

The DePaulia

‘Insolvent’ Detroit cleared for bankruptcy

U.S. Bankruptcy Judge Steven Rhodes officially cleared the way for the city of Detroit to enter Chapter 9 bankruptcy in a hearing held Dec. 3.

The city faces an estimated $18 billion in debt, according to the Detroit Free Press. Rhodes was faced with the task in deciding whether or not the city had met the requirements for bankruptcy, which included negotiating with creditors and proving that it was insolvent in its ability to pay off debts. According to BBC, the city must now devise a plan to take care of more than 100,000 creditors.

“Now that Judge Rhodes has approved the Chapter 9 bankruptcy filing, all individuals and corporations who have given credit to Detroit, and are owed money by the city of Detroit, have to get in line to see if they will get paid and how much they will get paid,” DePaul economics professor Gabriella Bucci said.

Among those owed money by Detroit are former city employees collecting pensions and retirement benefits. BBC reported that over half of the city’s debt is attributed to these pension contracts, which under the bankruptcy process could potentially be broken. Rhodes’ decision does not rule out pension cuts should they become necessary. As a result, several former city employees protested outside the courtroom while Rhodes reached a decision.

“If pensions get cut, the affected workers will be hurt and have lower post-retirement incomes. By filing for bankruptcy under Chapter 9, it is likely that Detroit will find it more difficult to borrow money through the municipal bond market in the future,” Bucci said. “This can have an impact on future development and growth in a multitude of city activities that are financed through municipal bonds.”

“On the plus side, the bankruptcy filing can allow Detroit to get a ‘fresh start’ and make the difficult decisions that will hopefully keep future spending in line with revenues,” she added.

In addition to the possibility of cutting pensions, the Detroit Free Press reported that the city is looking at other measures such as restructuring the sewage and water departments.  Another city asset that could be impacted is the Detroit Art Museum. In an effort to find cash quickly, the city has considered selling off art pieces in the museum.

“Any art owned by the city is considered equity and, in theory, could be sold to raise revenues to meet financial obligations,” Bucci said.

Those holding bonds with the city will be placed into the same boat as those with pensions. The city’s next step is to draft a plan that shows proposed cuts to creditors.  Detroit’s largest creditors will need to approve any plans put forth by the city; Rhodes’ approval would also be necessary.

Last week’s ruling makes Detroit the largest municipal bankruptcy filing in the United States. Kevyn Orr, Detroit’s emergency manager, filed for Chapter 9 bankruptcy July 18. At the time of the filing, the city’s unemployment rate was at 18.9 percent, according to the U.S. Bureau of Labor and Statistics.

Data from the U.S. Census showed that the city is home to approximately 700,00 residents, which is a decline of over one million since its 1950 peak of 1.85 million. In May, Orr presented a report finding that Detroit was home to over 150,000 abandoned or vacant buildings, BBC reported. The same report found that 40 percent of the city’s streetlights do not work.

As the home of the American automotive industry, the area was hit particularly hard at the onset of the recession in 2008. According to the U.S. Bureau of Labor and Statistics, unemployment spiked to over 27 percent by the summer of 2009. As automakers moved to the suburbs or out of the area altogether, Detroit’s economic base rapidly eroded.

“Detroit was overly dependent on one (declining) industry and never reinvented itself like Chicago, New York City, Boston and other cities,” DePaul economics professor William Sander said. “Also, the city was victimized by a particularly inept and corrupt government.”

Once hailed as the “Paris of the West,” the city of Detroit has a long uphill battle ahead.  Orr is eligible to be removed as the city’s emergency manager in September of next year by the city council, and he hopes the city can exit bankruptcy before that time.

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