When a City Goes Bankrupt: A Brief History of Detroit c. 2010
Detroit entered bankruptcy in July 2013 after a state-appointed emergency manager displaced local elected officials from power and chose not to pay $300 million due on the city’s debt. Bankruptcy offered a process in which the emergency manager could negotiate modifications to the debt without having to pay creditors during the negotiations.
Historically, instead of declaring bankruptcy, cities received more support from higher levels of government.
In bankruptcy, when a majority of creditors support a re-structuring plan, the plan binds every creditor. Outside bankruptcy, even one creditor can undermine the restructuring plan by insisting on a better deal for itself. Such a plan generally includes lower debt payments, which free a city from spending as much money servicing the debt, and further savings from shrinking the size of the public workforce, cutting services, and selling city-owned assets.
Seventeen months and nearly $180 million dollars in fees and costs later, Detroit emerged from bankruptcy having cut some municipal workers’ pensions nearly 7 percent, paid a financial creditor 13 cents on every dollar it was due, and obtained $325 million in new loans. In lengthy and often fraught negotiations at the local bankruptcy court downtown, the city had balanced its budget and gained ideas for generating new money to fund essential services.
Yet Detroit still faced the squeeze of population decline and widespread poverty that eroded its tax base and overburdened its public welfare programs, limited help from the federal and state governments, and no clear path to population growth or new jobs. Bankruptcy could not provide new remedies against financial problems. It could not directly reverse the population loss, employment loss, or property value loss that contributed to the shrinking tax base, nor could bankruptcy bring back lost federal and state support to offset pressures on public welfare.
For months Detroit’s problems headlined national news. Following that, how could the city attract people and businesses? If any new investment occurred, how would it affect existing residents? No one knew the ability of a courtroom bankruptcy process in a large American city to spur solutions to deep-seated structural problems, many the result of poverty, race, and power inequities.
No one knew in part because for decades cities hardly ever went bankrupt. Until the Great Depression bankruptcy procedures did not even exist for cities, and between 1970 and 2007 only three cities entered bankruptcy. Those cities had smaller populations than Detroit and used the bankruptcy process to address isolated setbacks like the loss of a large lawsuit or a natural disaster.