Detroit has become the largest city in US history to file for bankruptcy after accumulating spiralling long term debt estimated at $18.5 billion.
In a letter with the filing Rick Snyder, the Republican Governor of the state of Michigan, said he had approved a request from Detroit’s state-appointed Emergency Manager Kevyn Orr to file for Chapter 9 bankruptcy protection.
Mr Snyder said: “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.
“The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services. The only feasible path to a stable and solid Detroit is to file for bankruptcy protection.”
He said it was time to “face the fact that the city cannot and is not paying its debts as they become due and is insolvent.”Detroit stopped making payments on some of its of debt and obligations last month. The amount of money involved makes it by far the largest municipal bankruptcy ever in the US.
Mr Orr, a state-appointed former corporate bankruptcy expert who helped rescue the Chrysler car company, had released a plan in June to restructure the debt, but had warned he would be forced to see bankruptcy protection if negotiations with creditors failed.
The plan called for city-employed retirees to accept less than 10 per cent of what they were owed under pension plans.
But earlier this week the city’s two pension funds sued Mr Orr in an attempt to stop the cuts in retirement pay. An insurance group also threatened legal action.
Detroit's Emergency Financial Manager Kevyn Orr (Reuters)
A spokesman for Mr Orr told the Detroit Free Press shortly before the bankruptcy filing: “Pension boards, insurers, it’s clear that if you’re suing us, your response is ‘no.’” A court hearing in a case brought by city employees over the proposed pension cuts was to be heard on Monday.
If the employees had won it would have prevented the city filing for bankruptcy. Now that it has, the employees’ action is stayed.
The filing came as the credit agency Moody changes its outlook for the US economy from “negative” to “stable.”
Detroit has been beset in recent years by corruption, crime, and the collapse of the car industry, and has struggled to police its streets as people fled to the suburbs.
The murder rate is the highest in nearly 40 years, only a third of the city’s ambulances work, and police cars and fire trucks are also in poor condition. There are 78,000 abandoned buildings in the city and 40 per cent of the street lights do not work.