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Out of money, Detroit calls it quits

The city becomes the largest in the U.S. to declare bankruptcy. Job losses, crumbling services force action.

July 19, 2013|Tina Susman and Matt Pearce
  • The global headquarters of General Motors is visible from one of Detroit's many abandoned lots. The city declared bankruptcy Thursday.
The global headquarters of General Motors is visible from one of Detroit's… (Jeff Kowalsky / Bloomberg )

NEW YORK — Detroit on Thursday became the largest American city to declare bankruptcy, officially succumbing to job losses in the auto industry, decades of population flight, and the collapse of revenue to cover everything from policing to street lighting.

"Let me be blunt: Detroit's broke," Michigan Gov. Rick Snyder said as he recited a litany of ills that helped steer the decision and that made Detroit -- once a gleaming example of American industry -- into an urban wreck with debts of $18 billion.

The announcement came four months after Snyder named Washington bankruptcy expert Kevyn Orr -- who represented Chrysler during its successful restructuring -- as Detroit's emergency financial manager to try to heave Detroit out of its fiscal morass.

Orr at the time insisted that the city could "rise from the ashes."

But the destruction proved too great. Two days ago, Orr sent a letter to the governor saying he saw no alternative to filing for Chapter 9, blaming decades of fiscal mismanagement, plummeting population, decaying infrastructure and failing services.

For The Record
Los Angeles Times Sunday, July 21, 2013 Home Edition Main News Part A Page 4 News Desk 1 inches; 43 words Type of Material: Correction
Detroit bankruptcy: An article in the July 19 Section A about the city of Detroit's declaration of bankruptcy said that General Motors and Chrysler were saved from bankruptcy by a bailout from the U.S. government. The automakers declared bankruptcy and received a bailout.

"Detroit today is a shell of the thriving metropolis that it once was," wrote Orr, a summation that few who have witnessed the city's decline could challenge.

Snyder outlined the failures Thursday: Detroit has been among the nation's 10 most violent cities for 24 of the last 27 years. Average police response time is 58 minutes, compared to a national average of 11 minutes. And when it comes to crime, only 8.7% of cases are cleared.

At its peak, Detroit was the nation's fourth-largest city, with more than 1.8 million people. Population losses began in the 1960s with migration to the suburbs, picking up after a bloody race riot in 1967. The exodus gained further momentum as the automobile manufacturing industry, once the path to the middle class for an aspiring workforce, shrank.

Now, Detroit has about 700,000 people and thousands of abandoned buildings with acres of neglected lots. Thirty-eight cents of every city dollar goes to debt repayment and unfunded liabilities, the governor said.

By 2017, Snyder said, that would jump to 65 cents per dollar.

"That's not a sustainable situation," said the governor, who called Chapter 9 "the opportunity for a fresh start," not just for Detroit but for Michigan, a state whose fortunes are tied to those of its biggest city.

"For Michigan to be a great state, Detroit needs to be a great city," he said.

Detroit's action displaced Stockton, Calif., as the largest city to go bankrupt. San Bernardino also filed bankruptcy last August.

In Detroit, city and state officials greeted the decision with despair and resignation, but also a bit of hope, with many saying it had been expected.

"The best way to solve our PR problem is to fix the damn problem," said Sandy Baruah, chief executive of the Detroit Regional Chamber, who called the bankruptcy "without a doubt" the best way forward.

For the last three years, Baruah has seen signs of life shooting up around him: His office building in downtown Detroit has gone from half-empty to full. The walk to Comerica Park, three-quarters of a mile away, is filled with new businesses, new restaurants, and new faces.

But Detroit has still been held back by its failure to capture foreign investors, scared away by the city's ills.

"The first step in solving a problem is recognizing that you have a problem, and the second step is actually doing something about it," Baruah said.

In Washington, Sen. Carl Levin (D-Mich.), a Detroit resident, noted that the city was known for its grit and resilience.

"I know deep in my heart that the people of Detroit will face this latest challenge with the same determination that we have always shown," Levin said.

Sen. Debbie Stabenow, his fellow Democrat from Michigan, expressed a similar sentiment. "This is certainly one of the greatest challenges Detroit has faced in its long history," she said, "but the people of Michigan's largest city have met and overcome tremendous challenges in the past. There are so many positive things happening across the city, and I have every confidence that Detroit will emerge even stronger and more resilient."

Detroit has long been known as Motor City, but automobile production has been leaving the area for decades. U.S. auto companies, like all automakers worldwide, have increasingly become global operations.

During the recession, GM and Chrysler were bailed out by the U.S. government and saved from bankruptcy. Their sales have rebounded strongly, but the automakers have in the process become much leaner operations.

Only the reopening of factories and other facilities will help the city reverse its slide, said Chrysler Chief Executive Sergio Marchionne, when he discussed the automaker reinvestment in the region in March.

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