Why Did Detroit File for Municipal Bankruptcy?  

September 8, 2022

In July of 2013, Detroit filed for Chapter 9 municipal bankruptcy. The $18 billion bankruptcy case was the largest one of its kind in the history of the United States.

After thriving as the auto-making capital of the U.S. for decades, the city began to decline significantly over the years. Detroit was the fourth-largest city in the U.S. back in the 1940s, with almost 2 million residents. By the time the city filed for bankruptcy, that had declined to only about 700,000 people.

Michigan's then-Governor Rick Snyder appointed an emergency manager in March of 2013 to liquidate some assets and rewrite existing contracts.

When public employees rejected a forced cut to retirement benefits, and investors objected to taking huge cuts in the municipal bonds they purchased, the city said it had no choice but to file for bankruptcy.

Later that year, Detroit was determined to be eligible for Chapter 9 municipal bankruptcy. Below is an in-depth description of how the city got to that point, and what it did to get out of it.

Why Was Detroit in Debt?    

Detroit's march to bankruptcy in 2013 was years in the making. In fact, most economists trace it back to the latter years of the administration of Mayor Coleman Young.

Toward the end of Young's tenure in the early 1990s, Detroit found itself in a lot of debt. For a few years in a row, the city operated with a deficit in its budget. Before Young ever left office, he publicly stated his concerns about needing to declare bankruptcy to become solvent.

In July of 1992, almost exactly 11 years before the city filed bankruptcy, Detroit's debt rating was cut all the way down to "junk" by Moody's Investors Service.

The city was able to stave off further financial collapse for a few years in the late 1990s, thanks to the development of big projects such as professional football and baseball stadiums as well as downtown casinos. Moody's even increased the city's credit ratings to solid.

However, under Mayor Kwame Kilpatrick from 2002 through 2008, budget deficits popped up again, leading to financial audits. The city's bond ratings once again decreased to the "junk" rating. 

Michigan's review of the city's finances began in late 2011. In early 2012, unions agreed to accept major pay cuts, but that wasn't enough to avoid disaster. A full state review of Detroit's finances commenced in late 2012, with the release of an audit showing the city had a $326.6 million deficit.

Detroit filed for Chapter 9 municipal bankruptcy in July of 2013, defaulted on general obligation bonds in October, and was ultimately declared bankrupt in December of that samenyear.

How Did Detroit Get out of Bankruptcy?

There were many steps that Detroit took to get out of bankruptcy. The first happened in April of 2014, when the city came to a settlement agreement with investment banks for interest-rate swaps. 

Next followed deals with pension funds and retirees. This was funded by $816 million that was pledged by the state, the Detroit Institute of Arts and various foundations. 

Two separate settlement agreements occurred in April and July of 2014 with insurers and holders of the general obligation bonds that were defaulted on. Recoveries amounted to 74% for the unlimited tax general obligation bonds, and 34% for the limited-tax general obligation bonds.

Detroit workers and retirees approved the debt readjustment plan put forth by the city. The final two creditors who were holding out came to an agreement in early fall 2014, with a judge allowing the city to shed a total of $7 billion in obligations and debt. 

All of these events led to the announcement on December 10, 2014, that Detroit had exited bankruptcy.

How is Detroit Doing Financially?

Detroit's Chapter 9 bankruptcy gave it a second chance, and the city took full advantage of it. Only five years after it filed for bankruptcy, the city started issuing bonds once again -- this time backed by Detroit's own credit. 

The city's rebound was fueled in large part by downtown investments. Quicken Loans relocated its headquarters to downtown Detroit, and Dan Gilbert invested $5.6 billion across 100 properties. 

While the COVID-19 pandemic certainly affected the city's finances -- as it did cities all across the world -- Detroit is undoubtedly doing better today financially than it was in 2013.

Is Detroit Bouncing Back?

Private investment was a big part of seeing Detroit bounce back from the doldrums of the 1990s through 2013. Developments and revitalization projects have popped up all over the city. 

What Happened to Pensions in Detroit?

Many people are continuing to suffer from Detroit's bankruptcy. While the city itself was able to bounce back, many retirees had to start paying for their own health insurance. Others experienced a cut to their pensions.

The only way that Detroit would've been able to make it out of its financial troubles was by negotiating what are known as "clawbacks" with state pension plans and public workers. 

Some people lost up to 5% of their overall pension amount, while at the same time experiencing higher healthcare costs due to the elimination of future adjustments for increases in the cost of living. 

Will Detroit Continue to Recover?

Detroit has recovered from the Chapter 9 municipal bankruptcy from a financial standpoint, but there will be long-lasting effects. While investments returned to the city only a few years after Detroit emerged from bankruptcy, there remains a real cost to the people who used to work for the city.

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