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A Major American City is Broke

July 22, 2013
Plain English Version

Detroit, Michigan filed for bankruptcy. It is the biggest American city ever to do so. The filing puts in jeopardy payments to workers, retirees, creditors and bond-holders.

The fact is that Detroit owes about $20 billion to just about everybody. City services are so poor that people no longer call for ambulances.

The city filed for Chapter 9 relief. Filing is just the first step. The city has to prove it is broke and has no chance of recovery without relief from its enormous debt. The city’s mayor and the state’s governor approved the filing by an official appointed to manage the city’s finances on an emergency basis.

Detroit is a city of 700,000 people, less than half the size it was a few decades ago. It is known as “Motor City” because it was home to America’s three major carmakers: General Motors, Ford and Chrysler. The industrial landscape has so changed that Detroit is just a shell of what it once was.

Like many cities around the country, Detroit has been losing revenue because jobs and businesses fled. However, it has long-standing contracts with municipal trade unions, including health and pension payments. It can no longer keep up the payments.

There is great uncertainty about the impact of bankruptcy. Pension benefits are fixed by the state constitution. Contracts are agreements that cannot easily be ignored. Experts say there are going to be a great many new laws made. There are no precedents for such a big city going broke.

Unions and pension funds are charging that the city does not have to go into bankruptcy. They say the city is still solvent if agreements are made with creditors.

It is going to be a field day for bankruptcy lawyers. Every entity to which the city owes money will be fighting for the best settlement for their clients.

Meanwhile the city still needs to function. One deal with a creditor will allow the city to get $11 million a month to keep city services going.

Source: The Detroit Free Press

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