Detroit First City to Be Granted Bankruptcy Protection

The city of Detroit is making history this week as the first major US city to be eligible for bankruptcy protection after filing for Chapter 9 bankruptcy.

 

The ruling, announced last Tuesday by Judge Steven Rhodes of the United States bankruptcy court, allows the city to cut billions of dollars in salaries and retirement payments owed to city employees. The decision came despite heavy opposition from the city’s unions and pension funds.

 

Outside the courthouse, protestors gathered with signs reading “Protect our Pensions” and with messages warning against more bailouts to help banks.

 

In one plan, put forth by the city’s Emergency Manager Kevyn Orr, city workers could face serious benefit cuts. Orr’s plan proposed cutting more than $9 billion of the $11.5 billion in unsecured debt the city currently holds. However, it would mean significantly decreased benefits for city employees and cuts to the health coverage promised to retired city workers. City investors would also stand to lose.

 

Under the state of Michigan’s constitution, the pension cuts are illegal. But according to Judge Rhodes’ ruling, pension cuts would be allowed under federal bankruptcy law, following the idea that a federal ruling can override state law.

 

If the city moves forth with the pension cuts, it would be the first time that a city did so on an involuntary basis. Other cities, such as Vallejo, California, managed to get out of bankruptcy in 2011 without pension cuts.

 

Meanwhile, scores of retired city employees are preparing for decreased benefits by making plans to re-enter the workforce, seeking jobs in retail and the fast food industry. Many of these older jobseekers report that they are worried about their prospects of finding a job, between their age, gap in experience and the continuously lagging economy.

 

Detroit’s money troubles began back in 2005, when the city took a loan of $1.4 billion to cover pension liabilities. Then the recession hit in 2008. Now, according to Orr, it is estimated that Detroit owes a total of $18 billion, the largest amount of municipal debt of all municipal bankruptcy filings in the United States. Before, Jefferson County in Alabama held the record at $3.1 billion in 2011.

 

Once a thriving capital of the automotive industry, Detroit is now facing major problems relating to poverty and crime. Where in the 1950s its population was close to 2 million, it has now shrunk to 700,000, a third of whom fall below the poverty line. Detroit also has a 16% unemployment rate, one of the highest in the country, according to the Washington Post. There is also widespread crime and poorly functioning city services.

This year, Detroit topped the list of Forbes magazine’s Most Dangerous Cities in American for the fifth year in a row.

After the ruling, the next step will be for the Emergency Manager to put together a bankruptcy plan for the court. However, opponents are counting on the appeals process buying time and reconfiguring the plan. Orr has said that he is willing to work with creditors and unions, but has remained committed to helping the city reinvest in itself in order to improve services and drive down crime. He hopes that Detroit will be able to pull itself out of bankruptcy by 2014.


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