The bankruptcy filing makes Detroit the largest city in U.S. history to do so.
The filing begins a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities.
“The fiscal realities confronting Detroit have been ignored for too long. I’m making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future,” said Michigan Gov. Rick Snyder. “This is a difficult step, but the only viable option to address a problem that has been six decades in the making.”
Detroit Emergency Manager Kevyn Orr, who in June released a plan to restructure the city’s debt and obligations that would leave many creditors with much less than they are owed, has warned consistently that if negotiations hit an impasse, he would move quickly to seek bankruptcy protection.
Snyder signed off on the filing in a letter attached to court documents filed Thursday in U.S. Bankruptcy Court in the Eastern District of Michigan. A spokeswoman for Snyder did not immediately return telephone calls Thursday.
“It is clear that the financial emergency in Detroit cannot be successfully addressed outside of such a filing, and it is the only reasonable alternative that is available,” Snyder said in the letter granting his state-required approval. “In other words, the City’s financial emergency cannot be satisfactorily rectified in a reasonable period of time absent this filing.”
Snyder continued: “I have reached the conclusion that this step is necessary after a thorough review of all the available alternatives, and I authorize this necessary step as a last resort to return this great City to financial and civic health for its residents and taxpayers. This decision comes in the wake of 60 years of decline for the city, a period in which reality was often ignored.”
Orr’s spokesman Bill Nowling said, “Pension boards, insurers, it’s clear that if you’re suing us, your response is ‘no.’ We still have other creditors we continue to have meetings with, other stakeholders who are trying to find a solution here, because they recognize that, at the end of the day, we have to have a city that can provide basic services to its 700,000 residents.”
This week, the city’s two pension funds (which have claims to $9.2 billion in unfunded pension and retiree health care liabilities) filed suit in state court to prevent Orr from slashing retiree benefits as part of a bankruptcy restructuring.
Ambac Assurance Guaranty, which insures some of the city’s general obligation bonds, has also objected to Orr’s plan to treat those bonds as “unsecured,” meaning they’re not tied directly to a revenue stream and would receive pennies on the dollar of their value. Ambac, and other creditors, have threatened to file suit.