City of Detroit files for federal bankruptcy protection

Jul 19, 2013

The city of Detroit has filed for Chapter 9 federal bankruptcy protection making it the largest city in U.S. history to declare bankruptcy. We are updating this post as we learn more information. To see how the story unfolded scroll down and read up.

Final update on this post - 3:08 p.m.

And here we go - the beginning of a long line of likely court battles after the city of Detroit attempts to move through federal bankruptcy protection.

Today, Ingham County judge Rosemary Aquilina issued orders saying Detroit's bankruptcy filing violates the state constitution. More from the Detroit Free Press:

In a spate of orders today arising from three separate lawsuits, Aquilina said Gov. Rick Snyder and Detroit emergency manager Kevyn Orr must take no further actions that threaten to diminish the pension benefits of City of Detroit retirees.

State Attorney General Bill Schuette moved quickly and said he will appeal the judge's decision. He plans to ask the Michigan Court of Appeals to grant a stay of that order.

11:22 a.m.

Detroit Emergency Manager Kevyn Orr and Gov. Snyder held a press conference this morning to discuss the Chapter 9 bankruptcy filing for Detroit with the press. They both stressed that for the people of Detroit, "it's business as usual."

"Going forward...we will pay our bills," Orr said. He said priority will be given to those expenses relating to health, safety, and welfare.

Orr said that "bankruptcy is a tool in our toolbox" and the process gives him a chance to implement a plan that he laid out on June 14

"It gives us breathing room," Orr said. "We were getting sued on a weekly basis." Two Detroit pension boards filed suit to try to stop federal bankruptcy proceedings. The action prompted Orr and Snyder to push up the timing of the filing.

Orr told reporters that he asked for a "consensual process" with creditors and interested parties, "but that didn't happen."

Orr was asked "what shocked him most?" when he first opened Detroit's books. Orr replied it was the normalcy of the practice of continual borrowing in the face of mounting debt in Detroit that struck him most.

"What shocked me wasn't the numbers," he said. "What shocked me was the tolerance for this behavior for decades...I wish there had been a lot more outrage over the past ten to twenty years."

Orr referred to his short tenure as emergency manager to deal with Detroit's debt problem. "We're dealing with 60 years of deferred maintenance in 18 months. I can't afford to spend time running in place to fix the problems I'm here to address," he said.

Orr mentioned a list of mounting problems in Detroit as reason to take drastic action - children walking home in the dark after school because street lights don't work, "40 year-old trees" growing out of dilapidated buildings, and slow police response times.

"I recognize [Chapter 9 bankruptcy] is a lever, but we are trying hard to be fair."

Orr said they are looking for an entity to represent retirees in the bankruptcy proceedings, something he said some unions were unwilling to do.

Gov. Snyder became animated when talking about the Chapter 9 filing.

"Now is our opportunity to stop 60 years of decline. This is fundamental... how long has this ...we are doing something. This is forum. This is the place to do it in. This is the place to address the debt question...we will come out with a stronger, better Detroit." Gov. Snyder said. Snyder said not only do the citizens of Detroit deserve an improved city, but the people of Michigan deserve it as well.

9:30 a.m.

At 10:00 a.m., Gov. Snyder and Detroit Emergency Manager Kevyn Orr will hold a press conference on the Detroit bankruptcy filing.

You can watch it here (*Update - the news conference has ended, but they are playing it on loop so you can still view it below):

Watch live streaming video from cityofdetroit_live at livestream.com

Thursday, July 18, 7:50 p.m.

President Obama and his senior advisors are "closely monitoring the situation in Detroit," according to Reuters:

"While leaders on the ground in Michigan and the city's creditors understand that they must find a solution to Detroit's serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America's great cities," said Amy Brundage, a White House spokeswoman.

Political leaders have reacted to the news with a sense of the inevitable, and invoking words like "recovery."

Unions representing workers and retirees who stand to lose a lot are not happy.

AFSCME president Lee Sauders wrote this in a statement released this evening.

Governor Snyder’s plan to suspend democracy, drive one of America’s largest cities into bankruptcy and deprive workers of their hard-earned retirement security, moved dangerously closer to reality today when without a single negotiation with unions, workers or retirees, Snyder authorized Detroit’s financial manager to file for bankruptcy.

Despite assurances from Snyder’s hand-picked financial manager Kevyn Orr that AFSCME would have ample opportunity to discuss alternatives, they unilaterally embarked on this treacherous path without meaningful input from those who would be most affected.

Emergency Manager Orr said charges that he has not negotiated in good faith are unfounded.

Thursday, July 18, 6:30 p.m.

At a press conference this evening, Detroit Emergency Manager Kevyn Orr said it is "business as usual" in the city of Detroit despite today's federal bankruptcy filing. He said paychecks will go out and the city will continue functioning.

Detroit's retirees are facing potential cuts to their pensions and healthcare. When asked what it means for these pensioners, Orr said, "we don't know yet." He said he looks forward to negotiations with these groups.

Orr took issue with a statement that he hasn't been negotiating in good faith with the city's unions. "Anyone who says that, hasn't been paying attention," he said.

Orr said he feels an urgent need to fulfill city services  - a difficult task given the size of the city - 140 square miles.

"We don't have time for more delay tactics," Orr said. "As emergency manager, I have an 18 month term and I have 15 months left in it."

Detroit Mayor Bing was also at the press conference.

Bing said he hopes the filing allows the city to get services where people need them. Downtown and Midtown have seen a lot of reinvestment, he said, "but we've got to start investing in those neighborhoods where people live."

Gov. Snyder and Emergency Manager Orr are planning to hold another press conference tomorrow morning at 10 a.m.

We will post the live stream of the news conference.

Thursday, July 18, 6:00 p.m.

In a press conference with reporters, Gov. Rick Snyder said the decision to allow the city of Detroit to file for Chapter 9 bankruptcy was a difficult one, but that it is the right course of action, saying "the city of Detroit has been in decline for 60 years."

Gov. Snyder said he received the bankruptcy recommendation from Detroit Emergency Manager Kevyn Orr on Tuesday night. The two also met on Wednesday, he said.

When asked by MPRN's Rick Pluta whether the decision was influenced by lawsuits filed in an attempt to stop a bankruptcy filing, he said "not in any material way," but that it did influence the timing of the filing.

Snyder said municipal bankruptcy will help the city in two important ways:

  1. He said it will allow the city to sit down with creditors in an organized way - to tell them 'here are the debts we cannot pay and here's how we propose to move forward on this debt obligation.'
  2. He said it will allow the city to make plans for investing in the city so that services improve for the people of Detroit.

Tomorrow is a "normal day" for the people in Detroit, Snyder said.

Thursday, July 18, 5:23 p.m.

U.S. Senator Carl Levin (D-MI) just released this statement regarding the announcement of the Detroit bankruptcy filing:

“Detroit is more than a part of the state I represent in Washington. It is my lifelong home. And so today’s news that the city has filed for bankruptcy protection saddens me, however necessary it may have been. But what stands out about Detroit through the centuries is its grit and resilience. I know firsthand, because I live in Detroit, that our city is on the rebound in some key ways, and I know deep in my heart that the people of Detroit will face this latest challenge with the same determination that we have always shown.”

Thursday, July 18, 4:51 p.m.

Michigan Governor Rick Snyder had to approve the bankruptcy filing.

In a statement released this afternoon, Gov. Snyder said, "the fiscal realities confronting Detroit have been ignored for too long."

From his statement:

"I'm making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future," the governor said.  "This is a difficult step, but the only viable option to address a problem that has been six decades in the making." 

Or if you prefer video, here is Gov. Snyder explaining his decision:

Thursday, July 18, 4:33 p.m.

Detroit’s state-appointed emergency manager, Kevyn Orr, tried a conciliatory tone with the city’s creditors - in several meetings he told them the city simply cannot pay back everything that is owed to them - "Let’s make a deal," he said.

But Detroit owes these creditors A LOT of money (around $18 billion in debt) - and none of them want to be left holding an empty bag - or a bag with not much in it.

So if no deal can be made outside the courtroom, to the courtroom we go.

The city has filed for Chapter 9 federal bankruptcy protection, becoming the largest municipality in U.S. history to do so, according to the Associated Press.

More from the Detroit Free Press:

The filing begins a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer.

How common are municipal bankruptcies?

According to the U.S. Courts website, Chapter 9 cases are relatively rare:

In the more than 60 years since Congress established a federal mechanism for the resolution of municipal debts, there have been fewer than 500 municipal bankruptcy petitions filed. Although chapter 9 cases are rare, a filing by a large municipality can— like the 1994 filing by Orange County, California—involve many millions of dollars in municipal debt.

Change “millions” to “billions” if Detroit is successful in obtaining the protection of the federal courts.

Municipal bankruptcy (Chapter 9), is much different than other bankruptcy laws, such as Chapter 11. There is no provision in Chapter 9 that compels a city to sell off its assets in order to pay off creditors.

Again from the U.S. Courts:

Although similar to other chapters in some respects, chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution.

In fact, the city itself (the debtor) has much of the control in the process, including the power to break union contracts:

The municipal debtor has broad powers to use its property, raise taxes, and make expenditures as it sees fit. It is also permitted to adjust burdensome non-debt contractual relationships under the power to reject executory contracts and unexpired leases, subject to court approval, and it has the same avoiding powers as other debtors. Municipalities may also reject collective bargaining agreements and retiree benefit plans without going through the usual procedures required in chapter 11 cases.

Here's how people are reacting to the news on Twitter:

*We'll have more on this story as it develops.