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July 18, 2013

City of Detroit Files for Bankruptcy

by Kane Farabaugh

Detroit, Michigan filed for bankruptcy in U.S. federal court on Thursday, making it the largest municipality in U.S. history to seek Chapter 9 protection. The filing is the latest move that comes after years of population decline and decreasing tax revenues in a city plagued by corruption and financial mismanagement.
 
The decision to seek bankruptcy protection comes as Detroit finds itself under the direction of a state-appointed emergency manager, Kevyn Orr.  He is trying to address an annual budget deficit of more than $300 million, and long-term debt that has soared to $20 billion.
 
But Michigan State University professor Eric Scorsone says Detroit’s path to bankruptcy did not occur overnight.
 
“It was a one-industry city. Unlike Chicago, New York and other cities that had economic diversity, Detroit really didn’t.  It had the auto industry, it had suppliers to the auto industry, and so as those went away, the city began a very long decline that’s really occurred over 50 years essentially,” says Scorsone.
 
At Detroit’s peak in the early 1950s, the population was at 1.8 million residents.  By 2010, it was down to around 700,000, with people fleeing the city amid racial tensions and declining job opportunities. 
 
​​Wayne State University urban planning professor Robin Boyle says most of Detroit’s residents moved to the suburbs, or left the state altogether.
 
“They have so little disposable income to reinvest in their communities, that if they have money they leave, they go to the suburbs or they go to find work elsewhere, putting us into this vicious cycle that drives us further and further down. How you break that is the challenge in Detroit,” says Boyle.
 
In just the last decade, a bad situation in Detroit worsened as the industry that gave it the nickname “The Motor City” found itself in the worst financial shape since the Great Depression. The problem was triggered by slowing auto sales, amid declining home values and stricter lending practices, something Michigan State University professor Eric Scorsone says hit Michigan harder than most places.
 
“I think what really happened in the last 10 years though, Michigan went through a very significant 10-year recession, really unlike the country as a whole, and that’s when elected officials should have been responding and really didn’t,” says Scorsone.
 
​​Detroit’s elected mayor at that time, Kwame Kilpatrick, became embroiled in a corruption scandal that forced him from office and ultimately landed him in jail, a distraction that added to Detroit’s mounting financial woes.
 
But Scorsone says Kilpatrick is not solely to blame for the city’s current financial issues.
 
“Any city in this situation, no matter how good the elected officials and the managers were, would have had a very difficult time. So to be fair, I think it’s both. I think it’s a combination of both mismanagement and economic decline. It’s hard to say what proportion of each, but they’re both there,” says Scorsone.
 
Wayne State University’s Robin Boyle says amid Detroit’s economic mess are signs of hope in a downtown area now known more for its urban blight than thriving city life.
 
“General Motors moved down there. The downtown is beginning to see revitalization through the activities of one or two property investors, so that has strength,” says Boyle.
 
Detroit’s Chapter 9 bankruptcy filing begins a one- to three-month period of review by a federal judge. If the process moves forward, it could be several years before Detroit officially emerges from bankruptcy.