Motown has no mo´ options: Why did Detroit go bankrupt?
24/07/2013 | FxM – Evan Brock Gray
Some people may ask themselves: “How can a whole CITY declare bankruptcy?” So first of all, let´s look at what bankruptcy or “to go bankrupt” really is. Bankruptcy, or being so insolvent that you no longer can meet your financial and debt obligations now or in the future, is something you have to declare to a judge to be able to get the “benefit” of the protection that is afforded to you during court controlled insolvency proceedings. Contrary to popular belief, bankruptcy does not mean running completely out of money, assets, property or other valuable things. It does mean, however, that your creditors (who you can´t fully pay back now or in the future) will mostly only receive a part of what they lent you if and when your personal assets are liquidated (turned into money). It means you can´t refinance anymore, you can´t (really) negotiate and you can´t wait around for things to magically get better. Deciding to go bankrupt means you´re legally off the hook (but broke) and the people who lent you their money, service or time are legally stiffed.
But a city is made up by the people who live in it and the people who run it. The people who run the City of Detroit, like recently appointed Emergency Financial Manager Kevyn Orr, Detroit´s mayor David Bing and the Governor of Michigan Rick Snyder, decided to file for Chapter 9 Bankruptcy which allows a city and other types of municipalities to protect themselves from having to pay 100% of their obligations to a city´s creditors (there are 100,000+ in Detroit´s case). The people who live in the city have seen Detroit´s “judgement day” creeping up behind them over-so-steadily for years and, since they are understandably and absolutely fed up with non-performing short-term political fixes, they are not scared to take to plunge into the unknown world of middle-American metropolis bankruptcy.
They also realize they didn´t have much choice in the matter since democratically elected mayor Bing was swiftly relieved by outsider and legal municipal bankruptcy specialist Orr. Not having viable alternatives presented to them is not something new for Detroit residents. The city´s debt, calculated at somewhere between $18.5 and $20 billion dollars, has been growing unnecessarily for decades due to debt (mis)management policies that, in hindsight, appear ever so clear as the wrong way to go. Political differences, among others, have exacerbated the problems since the city of Detroit is strongly Democratic while the rest of the State and capital are strongly Republican. This creates a rift between ideologies about how to take on debt, how to use these funds and how to repay them. Refinancing debt can push the pain of payment on down the road but makes life more comfortable, but paying off debt by taking out new loans at higher interest rates or issuing low-grade municipal bonds is both senseless and risky, respectively. Detroit has taken both of these paths at the same time without finding a way to generate sustained growth in its revenue. Right now for every dollar earned by the city, 38 cents go towards legacy costs, making interest payments and paying debt obligations, and this figure will double in less than 10 years.
The Motor City has literally taken its foot off the gas pedal demographically, socially and economically since the late 1950´s. Once a thriving, cosmopolitan and industrial powerhouse, the city has seen its population decrease by more than 60% since then, losing many residents to the outlying suburbs and thereby losing its tax revenue base. The city also is very racially and economically segregated (the 8 Mile Road described by rapper Eminem is very real): African-Americans make up 82% of Detroit´s population and 33% of Detroit´s residents live under the federal poverty line ($22,000 per year for a family of four). On top of those dismal figures is the fact that about 1/4 of the households in Detroit are “single-mother” families. All of these facts usually set the stage for future economic hardship and have persisted in Detroit for many years.
Detroit has even been given the derogatory nickname “Murder City” because along with neighboring Flint, they have the highest murder rates in the entire U.S. Unemployment surpassed 25% at the height of the financial crisis in 2008-09 and hasn´t dropped under 15% yet. The city´s and surrounding communities´ dependence on the manufacturing and automotive industries for jobs means that when car makers General Motors and Chrysler decided to declare Chapter 11 Bankruptcy (for corporations) and accept federal bailout funds, the thousands of people who lost their jobs are finding it very difficult to “re-tool” themselves to the current job market. Very high city taxes, an archaic network of city services and entrenched labor unions make it difficult for businesses to want to start up operations or even stay within city limits.
Detroit has been caught in an economic and political downward spiral with little hope of being able to stop it, at least until now. There´s no economic growth to support the unsustainable (and constitutionally unchangeable) retirement, fixed-pension and healthcare plans for current and former city employees which is by far the largest and most serious part of the Detroit´s debt ($3.5 billion). People and businesses continue to leave the city. Political corruption has also played a major role in the city´s affairs recently with former mayor Kwame Kilpatrick´s conviction (along with a close contractor friend and his father) for crimes ranging from unexplained liquid (cash) earnings, racketeering, bribery, extortion, fraud and tax evasion and has been served a 20 to 30-year prison sentence.
Now politicians have said enough is enough in Detroit and have decided to fire their last shot: to file for bankruptcy protection. If and only if the bankruptcy proceedings are handled in a timely (within one year),socially responsible (not canc