Detroit filed for bankruptcy Thursday afternoon, becoming the nation's largest public sector bankruptcy. The move could slash pension benefits to city workers and retirees, and leave bond holders with only pennies on the dollar.
The bankruptcy was filed by Emergency Manager Kevyn Orr and approved by Michigan Governor Rick Snyder. Snyder said the financial condition of the city left him no choice.
"We have a great city, but a city going down hill for the last 60 years," he said at an evening press conference. He said 38% of the city's budget is being spent on "legacy costs," such as pensions and debt service. He said police take almost an hour to respond to calls, compared to a national average of 11 minutes, and that 40% of street lights in the city are turned off.
But public employee unions are sure to fight the move, charging that the city did not negotiate in good faith and should not be allowed to walk away from obligations made to employees and retirees.
The Detroit Fire Fighters Association said it was "very disappointed" with the bankruptcy filing.
Orr already halted payments on about $2 billion U.S. in debt last month, saying the city needed to preserve its dwindling supply of cash. The city faces total liabilities of about $18 billion U.S.
Orr's reorganization plan calls for cutting $11.5 billion U.S. in debt down to $2 billion U.S.. That would mean that investors and retirees would receive an average of just 17% of what they are owed. Specific plans for the cuts are unknown at this time.
Orr said that the city needs to cut debt to restore services and lower costs, such as taxes and insurance, which he says have chased businesses and residents out of the city.
Detroit's population has fallen 28% since 2000. The unemployment rate, while down from a peak of 27.8% in the summer of 2009 -- when General Motors and Chrysler Group were going through their own bankruptcies -- is still at 16.3%, nearly twice Michigan's statewide average.
While the auto industry has enjoyed a resurgence with strong car sales and profits, most of the industry's Michigan plants lay outside of city limits.
