Friday, July 19, 2013

Detroit's Bankrupt!

It was an inevitable decision. The city's tax base had eroded so severely that it could not even support a slashed budget. Michigan's Republican governor raised the white flag and authorized a petition in bankruptcy for Detroit, once America's showcase of industrial prowess. The governor said the sixteen page petition could put an end to Detroit's sixty years of declining fortune. US Person applauds succinct brevity, but many question remain about what is probably the biggest bankruptcy case in American history.  It dwarfs the previous municipal record set by Jefferson County, Alabama. Creditors are already objecting to the city's plan to pay them pennies on the dollar. City pensioners are also up in arms over the decision to file.

The city's emergency manager filed the voluntary petition for municipal reorganization (Chapter 9) on Thursday.  The Detroit Free Press reported that he had reached a deal for $255 million in short term financing for a DIP, or debtor in possession, to pay for the restructuring of the city's tangled finances. There was even questions about whether the emergency manager had the legal authority to file on behalf of the city, but since the bankruptcy was approved by the governor there seems little doubt it will go ahead. Detroit has $18.5 billion in long term debt. The city has assets of course, and many prized ones may appear on the auction block, such as the city's art work housed in the Detroit Institute of Arts. It is already selling vacant fire houses, often converted into townhouses by the trendy. Belle Isle, Detroit's famous island park, is also a potential sale item, but will probably be transferred to the state in return for consideration. The path through the legal process will be long and contentious.

What the bankruptcy means for private business is another unknown at this early date. Detroit is no longer the hub of the motor industry. Most jobs are provided by the public sector and the health industry. Chrysler has a major plant there and ranks 10th in employer size, while GM ranks 11th even with its headquarters located there. Detroit companies trying to recruit executives may have difficulty convincing them to relocate to a city that has the stigma of bankruptcy hanging over it. See this haunting slide show of abandoned Detroit.