• The Detroit Bankruptcy Fallout

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    Last Tuesday, a federal judge declared that Detroit met the specific legal criteria to receive protection from its creditors, making it the largest city in U.S. history to enter Chapter 9 bankruptcy.

    What does this mean for Detroit and its citizens?

    Well, literally it means the city of Detroit cannot meet its financial obligations to its creditors. But it also means that it has not been able to meet the obligations to its citizens, in terms of services provided and promises made. For current and former municipal employees, this almost certainly means that they will get pennies on the dollar for pensions and retirement benefits. And the city as a whole will continue to lose population, which has already dropped from 1.8 million in 1950 to just over 700,000 now, because Detroit cannot provide basic sufficient services, such as policing, fire and healthcare assistance.  And as a result of people leaving, the city will lose tax revenues and businesses, and real estate values will drop. So this has a lot of negative ramifications for the city. But if there is a silver lining, this might give the city an opportunity to shed its debt, restructure its finances, restore its services and reinvent itself without the baggage of the past 50 years.

    What will the fallout be? How much of a stigma will this carry?

    There is certainly going to be a lot of focus on this being the largest Chapter 9, or municipal, bankruptcy in U.S. history, both in terms of the size of the city and the size of the liabilities. We are talking about nearly $20 billion dollars in debt. With all of this hanging over the city, there will certainly be those that choose not to invest in Detroit, which will cost the city revenues. More importantly, this stigma will be very apparent in the higher borrowing costs for the city in the future. However, in the long term, I think it will be less of a factor, as Detroit has dealt with a negative perception for at least a decade. Perhaps this will allow the city to break out of the doldrums and reinvent itself.

    Do you think this means we’ll see even more people fleeing the city after this?

    I think that’s a pretty good bet. In the decades between 1950 and 1970, there was a lot of flight to the suburbs, but in recent years we have seen a different kind of exodus, based on the lack of services, from policing to parks and recreation. For example, in the last 10 years, Detroit has closed over 100 schools, eliminated the city’s Department of Human Services, cut funding for police and firefighters, and abandoned maintenance of numerous parks and other facilities. The restructuring might help turn this around, but in the short term, I think it is likely that more people will leave, particularly those retirees who will lose the most in the bankruptcy.

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