Is Detroit Ready to Take Its Next Step as a Bankrupt City?
U.S. Bankruptcy Judge Steven Rhodes could decide as early as Tuesday whether to allow Detroit to proceed with its bankruptcy filing, allowing the city to finally begin cutting down its approximately $18 billion in debt and unmet financial obligations.
Detroit first filed for bankruptcy on July 18, but the proceedings have been hung up in court over whether city emergency manager Kevyn Orr negotiated in good faith with pensioners and labor groups over the city’s pension liabilities before filing for Chapter 9. The decision made on December 3 could be appealed and move directly to a district court.
Detroit has about $3.5 billion in unfunded pension liabilities (the exact number is up for debate). These pension obligations are protected under the state’s constitution, but Orr reportedly wants to conduct Detroit’s bankruptcy under the umbrella of federal bankruptcy. This has pensioners concerned that their pensions will be put on the chopping block.
Whether or not the pensions are in real jeopardy is unclear. Michael Cook, a bankruptcy attorney who helped rewrite the Chapter 9 code in the 1970s, told The Detroit News that he thinks “it’s a pretty foregone conclusion” that the city will proceed with bankruptcy.
“The real test is, does the city have a financial problem? If you cut through all of the rhetoric, of course it does. I can’t think of a more eligible city,” he told the publication.
When Detroit filed for Chapter 9 just a few months ago, it had a headline unemployment rate of 18.8 percent, a $300 million deficit, and approximately $18 billion in debt and unmet financial obligations. As the automobile boom left the area, the city’s population — and therefore revenue — evaporated.
The number of people residing in the area has declined by 63 percent since 1950 and by 26 percent since 2000. With no one to pay taxes, there is no money coming in. The city has about 21,000 retirees drawing pension benefits and $5.7 billion in unfunded retiree health care liabilities on top of the $3.5 billion in unfunded pension obligations.
This is not to say that the city is doomed to be the post-apocalyptic wasteland that has lured filmmakers for the upcoming Batman and Superman movies. In fact, many businesses and investors — call them value investors — see great potential in the city and view its current financial distress as more of an opportunity than a death knell.
On top of the more than $100 million and boost in short-term employment that the filming of the Batman and Superman films are expected to bring to the city, Goldman Sachs recently announced that it would be folding Detroit into its 10,000 Small Businesses initiative. Goldman has pledged $15 million of lending capital to support Detroit’s small business community and an additional $5 million for business and entrepreneurial education programs.
“The potential’s huge,” Warren Buffett, the CEO of Berkshire Hathaway, who co-chairs the 10,000 Small Businesses initiative, said in a press release. “The United States with a flourishing Detroit is going to be a lot better than a United States without one.”
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