Yesterday, Detroit filed for a historic bankruptcy after the city’s emergency manager declared it insolvent. Creditors are opposing the move saying that the city’s plan to repay only pennies on the dollar is in bad faith, and city unions say that officials failed to negotiate or offer warning. The move also puts a new spotlight on Michigan Governor Rick Snyder’s controversial emergency manager law which effectively brings Michigan cities under fiat rule.
Snyder says the move is necessary to maintain basic services for Detroit residents, and many inside the city feel as though bankruptcy was likely inevitable. The city has been steadily losing population over the years, leaving an outsized municipality in the care of a shrinking tax base.
The cities unfunded obligations top $18 billion to over 100,000 creditors. On top of that city workers were promised pensions they are now, not likely to receive. According to some reports, nearly half of the city’s taxable properties are behind on their taxes making a small tax base even smaller. Jobs and quality education are also hard to come by in the area.
The city plans to file for Chapter 9 bankruptcy which will let it decide the order of its debt. This is where the emergency manager bill will likely show its weight the most, as the Republican Governor and emergency manager appointee, Kevyn Orr will be in the spotlight in terms of how they order debts. The Governor recently signed a Republican backed right to work bill, a move against workers unions.
Officials claim that much of the bankruptcy is due to the pension liability owed to Detroit’s unions, and Chapter 9 will allow them to avoid that debt entirely if they so choose. In corporate bankruptcy like the Chapter 11 version that Detroit automakers recently went through, rules require a judge to approve any plan to avoid paying pensions. Here, governments as sovereigns have the right to order their debts without judicial approval. Prior to Detroit, the largest municipal bankruptcy was Jefferson County, Alabama which filed over $4 billion in debt.