Friday, July 19, 2013

 

After tumbling from top of auto industry into financial ruin,Detroit files for bankruptcy

DETROIT — At the height of its industrial power,Detroit was an irrepressible engine of the American economy, offering well-paying jobs, a gateway to the middle class for generations of autoworkers and affordable vehicles that put the world on wheels.



Detroit filing for bankruptcy: The city of Detroit could file for federal bankruptcy as early as Friday.
Downtown Detroit


But by Thursday, the once-mighty symbol of the nation’s manufacturing might had fallen from that pinnacle into financial ruin, becoming the biggest U.S. city ever to file for bankruptcy — the result of a long, slow decline in population and auto manufacturing.
Although the filing had been feared for months, the path that lay ahead was still uncertain. Bankruptcy could mean laying off employees, selling off assets, raising fees and scaling back basic services such as trash collection and snow plowing, which have already been slashed.

Kevin Frederick, an admissions representative for a local career training school, called the step “an embarrassment.”

“I guess we have to take a couple of steps backward to move forward,” Frederick said.

Now city and state leaders must confront the challenge of rebuilding Detroit’s broken budget in as little as a year.

Kevyn Orr, a bankruptcy expert hired by the state in March to stop Detroit’s fiscal free-fall, said Detroit would continue paying its bills and employees.

But, said Michael Sweet, a bankruptcy attorney in Fox-Rothschild’s San Francisco office, “they don’t have to pay anyone they don’t want to. And no one can sue them.”

The city’s woes have piled up for generations. In the 1950s, its population grew to 1.8 million people, many of whom were lured by plentiful, well-paying auto jobs. Later that decade, Detroit began to decline as developers starting building suburbs that lured away workers and businesses.

Then beginning in the late 1960s, auto companies began opening plants in other cities. Property values and tax revenue fell, and police couldn’t control crime. In later years, the rise of autos imported from Japan started to cut the size of the U.S. auto industry.

By the time the auto industry melted down in 2009, only a few factories from GM and Chrysler were left. GM is the only one with headquarters in Detroit, though it has huge research and testing centers with thousands of jobs outside the city.

Detroit lost a quarter-million residents between 2000 and 2010. Today, the population struggles to stay above 700,000.

The result is a metropolis where whole neighborhoods are practically deserted and basic services cut off in places. Looming over the crumbling landscape is a budget deficit believed to be more than $380 million and long-term debt that could be as much as $20 billion.

In recent months, the city has relied on state-backed bond money to meet payroll for its 10,000 employees.

Orr made the filing in federal bankruptcy court under Chapter 9, the bankruptcy system for cities and counties.

He was unable to persuade a host of creditors, unions and pension boards to take pennies on the dollar to help with the city’s massive financial restructuring. If the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment.
Orr said Thursday that he “bent over backward” to work with creditors, rejecting criticism that he was too rigid. “Anybody who takes that position just hasn’t been listening.”

The bankruptcy could last through summer or fall 2014, which coincides with the end of Orr’s 18-month appointment, he said.

Gov. Rick Snyder, who called bankruptcy the “one feasible path,” determined earlier this year that Detroit was in a financial emergency and without a plan for improvement. He made it the largest U.S. city to fall under state oversight when a state loan board hired Orr.

Creditors and public servants “deserve to know what promises the city can and will keep,” Snyder wrote in a letter that was part of the filing. “The only way to do those things is to radically restructure the city and allow it to reinvent itself without the burden of impossible obligations.”

A turnaround specialist, Orr represented automaker Chrysler LLC during its successful restructuring. He issued a warning early on in his tenure in Detroit that bankruptcy was a road he preferred to avoid.

Some city workers and retirement systems filed lawsuits to prevent Snyder from approving Orr’s bankruptcy request, said Detroit-area turnaround specialist James McTevia.

They have argued that bankruptcy could change pension and retiree benefits, which are guaranteed under state law.

Others are concerned that a bankrupt Detroit will cause businesses large and small to reconsider their operations in the city. But General Motors does not anticipate any impact to its daily operations, the automaker said Thursday in a statement.

Detroit has more than double the population of the Northern California community of Stockton, Calif., which until Detroit had been the largest U.S. city ever to file for bankruptcy when it did so in June 2012.

Before Detroit, the largest municipal bankruptcy filing had involved Jefferson County, Ala., which was more than $4 billion in debt when it filed in 2011. Another recent city to have filed for bankruptcy was San Bernardino, Calif., which took that route in August 2012 after learning it had a $46 million deficit.


Detroit bankruptcy first step in 'restoring the city'

State-appointed emergency manager Kevyn Orr on Thursday asked a federal judge for permission to place the city into Chapter 9 bankruptcy protection.



DETROIT – Detroit filed the largest-ever municipal bankruptcy in U.S. history on Thursday, marking a new low for a city that was the cradle of the U.S. automotive industry and setting the stage for a costly court battle with creditors.

Following the filing, Detroit's emergency financial manager, Kevyn Orr, said bankruptcy is the "first step toward restoring the city."

The filing put the city on an uncertain course that could mean laying off municipal employees, selling off assets, raising fees and scaling back basic services such as trash collection and snow plowing, which have already been slashed.

Orr says it will be business as usual in Detroit. He says the city will stay open and bills will be paid.

Detroit Mayor Dave Bing says he didn't want the city to go bankrupt, but now that it's happened, the people of the city "have to make the best of it."

In a letter accompanying the filing, Michigan's Governor Rick Snyder said he had approved a request from Orr to file for Chapter 9 bankruptcy protection noting, "Detroit simply cannot raise enough revenue to meet its current obligations, and that is a situation that is only projected to get worse absent a bankruptcy filing."

Snyder, a Republican, named Orr in March to tackle the city's spiraling long-term debt, which is estimated at $18.5 billion.

Detroit was once synonymous with U.S. manufacturing prowess. Its automotive giants switched production to planes, tanks and munitions during World War Two, earning the city the nickname of the "Arsenal of Democracy."

Now the city's name has become synonymous with decline, decay and crime. Detroit has seen its population fall to 700,000 from a peak of 1.8 million people in 1950. The city's government has been beset by corruption cases over the years. Waning investment in street lights and emergency services has left it struggling to police the streets.

Related: New Whole Foods sets tongues wagging in cash-strapped Detroit

The city's murder rate is at its highest in nearly 40 years; only a third of its ambulances were in service in the first quarter of 2013; and its nearly 78,000 abandoned buildings create "additional public safety problems and reduces the quality of life in the city," the governor noted in his letter.

In June, Orr presented a proposal to creditors offering them pennies on the dollar. His plan had met with resistance from some creditors, most notably Detroit's two pension funds representing retired city workers. The funds recently filed lawsuits in a state court challenging the governor's ability to authorize Orr to file for bankruptcy.

Creditors are expected to mount a stiff challenge to the bankruptcy, which was filed in the U.S. Bankruptcy Court in the Eastern District of Michigan.

Douglas Bernstein, a bankruptcy attorney at Plunkett Cooney in the Detroit suburb of Bloomfield Hills, said he expected the case would last one-to-three years and would be very costly.

"This could run to tens-of-millions to hundreds-of-millions of dollars," he said.

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