In this July 12, 2013, an Outsource to Detroit banner from Galaxe.Solutions is seen on a Detroit building.
Detroit, saddled with more than $18 billion in debt, became the biggest U.S. city in history to file for bankruptcy on Thursday.
Once a symbol of America's industrial might and more recently an example of urban decay, crime and hopelessness, the home to the nation's automobile industry took the extraordinary step after months of negotiations with creditors failed.
“The fiscal realities confronting Detroit have been ignored for too long. 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,” Gov. Rick Snyder said in a statement. “This is a difficult step, but the only viable option to address a problem that has been six decades in the making.”
Snyder authorized the city's emergency manager to file for federal bankruptcy, as required by state law, saying it was the only option to restore the city and provide residents with necessary public services.
Kevin Orr, a bankruptcy expert, was hired by the state in March to lead Detroit out of a fiscal free-fall and made the filing in federal bankruptcy court.
Orr was unable to convince a host of creditors -- including pensions, Teamsters, employee associations and banks -- to take pennies on the dollar to help facilitate the city's massive financial restructuring.
He laid out his plans in June meetings with debt holders, in which his team warned there was a 50-50 chance of a bankruptcy filing.
A number of factors — most notably steep population and tax base falls — have been blamed on Detroit's tumble toward insolvency.
Detroit lost a quarter-million residents between 2000 and 2010. A population that in the 1950s reached 1.8 million is now struggling to stay above 700,000. Much of the middle-class and scores of businesses also have fled Detroit, taking their tax dollars with them.
In a letter that accompanied the federal filing, Snyder listed the city's ailments: The city's unemployment rate has tripled since 2000; its homicide rate is at its highest in nearly 40 years; residents wait an average of 58 minutes for the police to respond to their calls (the national average is 11 minutes).
The governor's statement on Thursday said that 38 cents of every city dollar goes toward debt repayment, legacy costs and other obligations. That was expected to reach 65 cents per dollar by 2017.
When Orr initially made his pitch to creditors, some were asked to take about 10 cents on the dollar of what the city owed them. Underfunded pension claims would have received less than the 10 cents on the dollar under that plan.
A team of financial experts put together by Orr said that proposal was Detroit's one shot to permanently fix its fiscal problems.
On Wednesday, as the bankruptcy filing was imminent, Detroit's two pension funds filed a lawsuit against the governor and Orr, the Free Press, Detroit's hometown paper, reported. Detroit city employees filed suits earlier this month as well -- for fear their pensions would be slashed if the city filed for bankruptcy.
Earlier Thursday, the Free Press said the filing would set off 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."
If the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment.
In the letter to the court, Snyder wrote: "I know many will see this as a low point in the City's history. If so, I think it will also be the foundation of the City's future -- a statement I cannot make in confidence absent giving the City a chance for a fresh start, without burdens of debt it cannot hope to fully pay."
The Associated Press and Reuters contributed reporting.
First published July 18 2013, 3:05 PM