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A vacant burned out house sits in an area that used to be filled with houses in Detroit's east end (Deborah Baic/The Globe and Mail)
A vacant burned out house sits in an area that used to be filled with houses in Detroit's east end (Deborah Baic/The Globe and Mail)

Business Briefing

Neglect, corruption, exodus: What drove Detroit to historic bankruptcy Add to ...

These are stories Report on Business is following Thursday, July 17, 2013.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Detroit seeks bankruptcy
Detroit, once one of the great power centres of North America, has collapsed, filing for what will be the biggest municipal bankruptcy in U.S. history.

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The city’s emergency manager, Kevyn Orr, today asked a court to put the municipality into bankruptcy protection, in what is known as a Chapter 9 filing, one that could lead to further cutbacks.

Detroit's move followed negotiations with creditors, including those asked to take a substantial haircut on their debts.

The filing by the city, the heart of the American auto industry, is being closely watched by other troubled municipalities to see what lessons can be learned from a restructuring. In this case, though, officials failed to pull off a massive restructuring outside of bankruptcy. Other cities and regions, notably Alabama’s Jefferson County, have also filed for bankruptcy.

"While many who love Detroit still live there, many other Detroiters at heart could not justify the sacrifice of adequate services," Michigan Governor Rick Snyder said in a letter authorizing Mr. Orr to pull the trigger.

"The city's population has declined 63 per cent from its peak, including a 28-per-cent decline since 2000," the governor added.

"That exodus has brought Detroit to the point that it cannot satisfy promises it made in the past."

(See separate story on what the bankruptcy filing could mean to Windsor, Ont.)

Detroit’s population has plunged to about 700,000 from 1.8 million in the heady manufacturing years of the 1950s, and its household income has declined to well below the state level. The auto industry, of course, was decimated by the financial crisis and recession, with both General Motors and Chrysler falling into bankruptcy, requiring a rescue by American and Canadian governments.

Mr. Orr has been extremely critical of how the city was run in past years, saying in a recent report that its operations “have become dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption.”

The governor said today that he municipality cannot meet its "basic obligations" to its citizens and creditors.

"The scale and depth of Detroit's problems are unique," he added.

"The city's unemployment rate has nearly tripled since 2000 and is more than double the national average. Detroit's homicide rate is at the highest level in nearly 40 years, and it has been named as one of the most dangerous cities in America for more than 20 years."

Among the points he cited:

  • Citizens wait an average of 58 minutes for police to respond, and just 8.7 per cent of cases are solved. "The city's police cars, fire trucks and ambulances are so old that breakdowns make it impossible to keep up the fleet or properly carry out their roles."
  • Only one-third of the city's ambulances were in service in the first quarter.
  • Some 40 per cent of the street lights were dead in the first three months of the year.
  • Some 78,000 abandoned structures are creating public safety problems.
  • The city has more than $18-billion (U.S.) in financial obligations, and even if it could raise taxes, the people can't afford to pay them.

"The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services," the governor said.

"The city's creditors, as well as its many dedicated public servants, deserve to know what promises the city can and will keep."

According to Reuters, creditors are expected to dispute the filing in U.S. Bankruptcy Court for Michigan’s eastern district. Reuters also quoted a bankruptcy lawyer as saying the landmark case could take between one and three years to resolve.

General Motors, for one, said it would stand by the municipality.

“GM is proud to call Detroit home and today’s bankruptcy declaration is a day that we and others hoped would not come,” the auto maker said. “We believe, however, that today also can mark a clean start for the city.”

Mr. Orr, who was appointed by Michigan’s governor, has met with creditors and other stakeholders. In a recent report, he painted an exceptionally bleak picture of the city.

“Current levels of municipal services of all types to residents and businesses within city limits, including public safety services, are inadequate,” he said in the mid-May document.

“With high crime rates and poor public services in many areas, the health, safety and quality of life of Detroiters has suffered materially,” he added.

“Tax revenues have decreased over time as the population of the city has dwindled to less than half of its postwar peak and the local economy has suffered, with unemployment tripling since 2000.”

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