Detroit, the heart of the American automobile industry and the country’s 18th most populous city, filed for the largest municipal bankruptcy in U.S. history yesterday. The city experienced a dramatic drop in population over the last few decades — from 1.8 million in 1950 to only 700,000 people today — and ended up $18 billion in debt. Although Detroit is one of several American cities to teeter near the edge of financial ruin in the last few years, it is the most populous city file for bankruptcy — twice the size of Stockton, California, which did the same in 2012.
Photo by Bernt Rostad
The fall of the great Midwest metropolis was preceded by a long period of expansion. During the first half of the 20th century, Detroit became the center of the nation’s automobile industry and home to the largest surviving collection of late 19th and early 20th century buildings in the United States.
Detroit’s automotive giants Chrysler and General Motors filed for bankruptcy in 2009, but soon recovered, bringing reassurance to the residents. However, experts say that the corporate and municipal bankruptcies have different legal mechanisms and consequences. In the case of municipal bankruptcies, judges have limited influence on how the city is run. Also, municipal bankruptcies are a form of debt adjustment, while companies may be subjects to liquidation or reorganization.
City officials have proposed to pay small fractions of the debt, treating large investors that hold general obligation bonds not different in payment priority than, for example, city workers. This strategy might give Detroit the opportunity to restructure and cut the costs of its pension and retiree health care. Fighting to get out of economic problems, the city could set a precedent that could encourage other financially troubled cities across the country to follow its path.
It is not certain what the bankruptcy will mean in the long term. According to city officials, the city business will continue as usual. City workers were sent reassuring letters, while a special hot line will be introduced to help worried residents and others get information.