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Detroit Files For Bankruptcy: 7 Reasons Why It Happened


Detroit filed for Chapter 9 bankruptcy with $18 billion in debt, becoming the largest U.S. city to ever take such a drastic step. Why did this happen and what’s next for the Motor City? Here are your Detroit bankruptcy basics:

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Detroit has filed for Chapter 9 bankruptcy with $18 billion in debt. PHOTO: Shawn Wilson, CC License

Detroit filed for Chapter 9 bankruptcy with $18 billion in debt, becoming the largest U.S. city to ever take such a drastic step. Why did this happen and what’s next for the Motor City? Here are your Detroit bankruptcy basics:

1.       Detroit Lost 200,000 people between 2009 and 2010

Detroit got slammed by the financial crisis, both in dollars and population. With General Motors needing a bailout to survive, and the city’s economic base in shambles, Detroit residents scattered in search of work. According to the U.S. Census Bureau, Detroit went from 910,921 people in 2009 to 706,585 the next year.

2.       Detroit’s population had been declining steadily since 1950.

In 1950, Detroit had 1.85 million people. Twenty years later, that number was 1.5 million. A third of them were gone by 1990, when Detroit had just over a million. The population continued its steady decline until 2009, when it made its precipitous drop. This loss in population sowed the seeds for Detroit’s bankruptcy.

3.       Due to its loss in population, Detroit had the financial obligations of a city twice its size.

If you count up all of Detroit’s active workers and retirees who are drawing pension benefits, as of 2011, the retirees make up 61% of the total. That could potentially work if Detroit was booming Silicon Valley or sitting on a massive supply of shale oil, but Detroit is in the situation it’s in because the economy has been sagging with the auto sector for decades. The 39% of active workers aren’t paying enough in taxes to make up for the pensioners who are simply collecting what they have been promised. Detroit is reportedly paying $1,600 a month to 21,000 retirees. The city only employs 9,700 workers. The long-term obligations promised by the city made bankruptcy hard to avoid once Detroit started losing population so quickly.

4.       Pension obligations account for about half of Detroit’s debt.

Detroit has between $18-20 billion in debt, according to the New York Times. According to the Detroit Free Press, $9.2 billion of that is accounted for by unfunded pension liability ($3.5 billion) and unfunded retiree health care liability ($5.7 billion).

5.       The biggest single contributor to Detroit’s debt: The Detroit Water and Sewerage Department

The Detroit Water and Sewerage Department (DWSD) accounts for nearly a third of Detroit’s debt with $5.9 billion in outstanding obligations. The DWSD’s problems officially started in 1977, when they were ordered by the EPA to deal with unlawful amounts of “effluent” being discharged from Detroit’s water treatment plants. DWSD bonds were recently downgraded to junk status over fears that Detroit would not be able to pay them back.

6.       Detroit’s deficit increased steadily from 2007 to 2013

In 2007, Detroit’s deficit was a relatively pedestrian $100 million. From there it increased steadily at a rate of $100 million a year (there was a smaller increase from 2010 to 2011, which was immediately made up for the following year). The steady rise shows that the financial crisis coincided with Detroit’s collapse, but that the erosion of Detroit’s finances happened gradually.

7.       Detroit’s bankruptcy sets off a fight between creditors and pensioners

Detroit owes money to pensioners and to creditors, and at least one of those groups will get screwed. What exactly happens will be settled over the coming months and years in bankruptcy court. Op-eds and petitions are already flying on both sides about how Detroit has a solemn obligation toward each side. The trouble is, without a huge influx of cash, those can’t both happen.


Carbonated.TV
2013-07-19 11:10:19.0