Detroit's Debt: How a Major City Goes Bankrupt

Detroit's Debt: How a Major City Goes Bankrupt

In a desperate move to remedy the city’s dire finances, the city of Detroit filed for bankruptcy on Thursday, becoming the largest municipality in U.S. history to do so.

The cash-strapped city has barely held on for the past two years, and is currently struggling under more than $18 billion of debt.

Municipal bankruptcies are, of course, considerably rare. Since the 1950s, a little over 60 cities, towns, villages, and countries have done so, and in those cases, the magnitude of debt lagged far behind what Detroit currently faces.

The Decline of Detroit

Detroit's decision to file for Chapter 9 was a long time coming.

In its heyday, Detroit was a booming American metropolis, boasting the fourth-highest population in the country and a thriving automobile industry.

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But over the past half-century, those fortunes have largely slipped away.

As automobile factories skidded to a halt, a large mass of the population fled with the business. Since the 1950, the population has plunged 63%.

At the same time, the city has battled some of the highest unemployment rates in the country—almost 30% in July 2009—and a rate of violent crime that’s the highest of any large U.S. city.

As tax revenues shrank with the population, city services were slashed. Today, 40% of the street lights have gone dark, and there are widespread complaints of dismal response times from emergency services. It now takes nearly an hour for a response from police, compared to a national average of 11 minutes.

The city, which barely 700,000 people currently call home, is now pockmarked with boarded-up buildings, vacant lots and abandoned streets.

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There are a number of factors that have impacted Detroit's finances. It particular, the city struggles to cover rapidly rising health care and pension costs. Today, almost 40% of Detroit’s budget is allocated to “legacy costs,” like pensions. Rampant mismanagement and dysfunction within city hall has significantly compounded the area's problems, and its budget has consistently fallen in the red since 2008. Filing for Chapter 9 was the “only reasonable alternative” for debt-ridden Detroit to stay afloat, said Michigan Gov. Rick Synder.

But this “last resort” could be devastating to many public employees, whose benefits and pensions may be desecrated in the deal.

What Does This Mean for the People of Detroit?

There is large uncertainty about how the decision will pan out.

The daily workings of Detroit are unlikely to change in the immediate future, but public employees and retirees are on edge, and are sure to contest the decision. Experts estimate that the coming debt process could take months, and warn that it will be considerably complex.

Officials say that for now, the usual city businesses and services will continue as usual. (Presumably, the few that do, in fact, still exist.)

The Governor hopes that bankruptcy will be the route to reversing the city's fate. “Now’s our opportunity to stop 60 years of decline,” Snyder said at a news conference on Friday. “How long had this been going on and people were kicking the can down the road and not doing something? We’re doing something.”

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