Detroitâ€” The city of Detroit filed the largest municipal bankruptcy case in U.S. history Thursday, culminating a decades-long slide that transformed the nationâ€™s iconic industrial town into a model of urban decline crippled by population loss, a dwindling tax base and financial problems.
Gov. Rick Snyder justified approving the historic filing by reciting a litany of the cityâ€™s ills, including more than $18 billion in debt, maxed-out tax rates, the highest murder rate in 40 years, 78,000 abandoned buildings and a half-century of residential flight. He said the city failed to provide basic services to residents or pay creditors.
The filing, which has broad implications for the nationâ€™s municipal bond market and sanctity of public pension funds, was met with outrage, disappointment and a vow to fight. Some creditors adopted a war stance, threatening a prolonged battle. Others accused Emergency Manager Kevyn Orr of failing to negotiate in good faith â€” an essential requirement for approval of a bankruptcy petition â€” during his month-long push to secure concessions from creditors, including deep cuts to pensions.
â€œItâ€™s war,â€ said George Orzech, chairman of the cityâ€™s Police and Fire pension fund.
The 16-page bankruptcy petition was shrouded in secrecy and filed amid drama. Snyder planned to file the bankruptcy petition today in U.S. District Court but reversed course after learning the cityâ€™s pension funds planned to ask a judge to block a filing, according to a source. The petition was filed at 4:06 p.m. Thursday and cost the bankrupt city $1,213.
Eighteen minutes later â€” too late to make a difference â€” Ingham County Circuit Judge Rosemarie Aquilina signed a restraining order.
Snyder authorized Orr to file bankruptcy under a controversial law the Legislature passed in December that replaced the previous emergency manager law voters repealed last November.
â€œThere were no other viable alternatives,â€ Snyder told reporters Thursday. â€œWe have a great city but a city that has been going downhill for 60 years.â€
Orr said he will continue trying to secure deals with additional creditors that could ease the cityâ€™s path through bankruptcy court. He said he hoped the city could restructure and emerge from bankruptcy court next year, by late summer or early fall.
During a month of negotiations, Orr has reached a settlement with only two creditors: Bank of America Corp. and UBS AG. They have agreed to accept 75 cents on the dollar for approximately $340 million in swaps liabilities, according to a source familiar with the deal.
Orr had harsh words for those who tried to block the cityâ€™s restructuring efforts.
â€œWe donâ€™t have time for more delaying tactics,â€ Orr said.
Orr insisted he â€œbent over backwardsâ€ and negotiated in good faith during more than 100 meetings with creditors. In court filings late Thursday, he said it was impossible to reach an accord with â€œmany tens of thousands of creditorsâ€ and accused unions of refusing to negotiate on behalf of the cityâ€™s 20,000 retirees.
The filings also indicated that Orr may be open to offers on the Detroit Institute of Artsâ€™ collection, which is worth billions. Orr said he will continue to â€œengage all interested parties in dialogue regarding the City-owned art collectionâ€ and â€œreach a resolution with respect to such assets that will maximize the long term benefits to the City and the prospects for a successful restructuring.â€
Orr also will continue to evaluate how much money the city could collect by selling other assets, including Belle Isle, the Detroit-Windsor Tunnel, real estate and municipal parking operations.
Mayor Dave Bing, whose powers were usurped when the governor appointed Orr in March, spoke of Thursdayâ€™s moves with a mix of resignation and optimism.
â€œAs tough as this is, I didnâ€™t want to go in this direction,â€ Bing said. â€œNow that we are here, we have to make the best of it. If it is going to make citizens better off, this is a new start for us.â€
But not until creditors feel varying degrees of pain, experts said.
Unsecured creditors could take the biggest hit in bankruptcy court. Orr wants them to share a $2 billion payout on approximately $11.5 billion worth of debt, which includes an estimated $9.2 billion in health and pension benefits and $530 million in general-obligation bonds.
â€œPain is going to be handed out to a number of creditors simply because Detroit has no other option,â€ said Dan Heckman, senior fixed income strategist with U.S. Bank Wealth Management in Minneapolis.
Orr chronicled the cityâ€™s economic collapse in a detailed plan presented to creditors June 14 â€” a proposal that drew criticism from some who said the cuts were too deep and did not include the sale of city assets, including Belle Isle and a Detroit Institute of Arts collection. He proposed paying most of the money owed to secured creditors while pension funds, unions and unsecured bondholders would receive, in some cases, as little as 10 cents on the dollar.
Instead of paying creditors in full, Orr said he would use $1.25 billion over the next decade to buy police cars and fire trucks, replace broken street lights, tear down burned-out homes, fight blight and improve city services.
Orr said he wants to stabilize the city, woo new residents, provide essential city services, lower property taxes and transfer costly departments, including the water and sewerage, to an outside group.
The bankruptcy filing gives Orr unusual power to break promises made by past city officials that left Detroit on a path to spending almost 65 percent of every tax dollar on retiree pensions and health care.
The Chapter 9 filing could take years, experts said, despite hopes by Snyder and Orr thatit can be wrapped up in a year. A bankruptcy judge could trump the state constitution by slashing retiree pensions, ripping up contracts and paying creditors roughly a dime on the dollar for unsecured claims worth $11.45 billion.
â€œDetroit cannot afford any further attacks on working families, who have already sacrificed so much without a say in the process,â€ Metro Detroit AFL-CIO president Chris Michalakis and Michigan State AFL-CIO president Karla Swift said in a statement. â€œCity workers have already made severe concession to keep the city afloat. It is time to put the needs of Detroit residents above the interests of out-of-town creditors.â€
The filing is expected to trigger a costly, long and precedent-setting battle by creditors â€” the city has more than 100,000. Detroitâ€™s bankruptcy case could become a template for the treatment of pensions in future municipal bankruptcies.
â€œThe negotiations from here are likely to be long and complex, offering no resolution or clarity perhaps for years,â€ said Peter Hayes, who heads BlackRockâ€™s Municipal Bonds Group. â€œUltimately, itâ€™s important for market participants to understand that Detroit is the exception and not the rule. This is first and foremost a Michigan issue, not a systemic municipal market issue.â€
The bankruptcy case will be assigned by Alice Batchelder, chief judge of the 6th U.S. Circuit Court of Appeals, which spans Michigan, Ohio, Kentucky and Tennessee. Any judge in the four-state region could be assigned the case, though Batchelder will weigh potential political concerns and decide who has the time and capability to handle a complex, large case in Detroit.
Once the nationâ€™s fourth largest city, Detroit was hailed as an industrial hub with nearly 2 million people.
Today, there are about 700,000 residents after a half-century of residential flight, high unemployment, a significant reduction in state funding, plummeting income and property taxes, corruption and chronic mismanagement.
The filing serves as a grim reminder of the bankruptcies in the auto industry four years ago. Unlike the cases of General Motors and Chrysler in 2009, the White House offered no financial help.
Steven Rattner, the Obama administrationâ€™s auto czar who steered the General Motors and Chrysler bailouts, said the state will have to help fund Detroitâ€™s exit from bankruptcy.
â€œItâ€™s really ugly,â€ Rattner said Thursday.
20 largest creditors
Here are the cityâ€™s 20 largest unsecured creditors and type of claim:
â– General Retirement System: (A) $2 billion
â– Police and Fire Retirement System (A) $1.4 billion
â– U.S. Bank (B) $801 million
â– U.S. Bank (B) $516 million
â– U.S. Bank (B) $153 million
â– U.S. Bank (C) $79 million
â– U.S. Bank (C) $61 million
â– U.S. Bank (C) $59 million
â– U.S. Bank (C) $45 million
â– U.S. Bank (C) $40 million
â– U.S. Bank (C/E) $38 million
â– U.S. Bank (C) $38 million
â– U.S. Bank (C) $35 million
â– Downtown Development Authority (D) $34 million
â– U.S. Bank (C) $30 million
â– U.S. Bank (E) $25 million
â– U.S. Bank (C) $19 million
â– U.S. Bank (C) $19 million
â– U.S. Bank (C) $13million
â– U.S. Bank (C/E) $11 million
(A) pension funds; (B) certificate of participation; (C) general obligation bond; (D) loan payable; and (E) capital improvement bond.