City of Detroit files for bankruptcy, will other cities follow?

Detroit files for Chapter 9 bankruptcy

A declining population, difficulty in repaying creditors and more are reasons cited as the push behind the city of Detroit’s decision to file Chapter 9 bankruptcy this past Thursday. Chapter 9 bankruptcies applies to municipalities, counties, and other public entities, and the decision will allow the city to come up with a restructuring plan to repay its creditors as previous attempts at negotiations have been unsuccessful.

Prior to the filing, Detroit’s emergency manager Kevyn Orr was in talks with several of the city’s creditors but was only able to reach repayment agreements with two large banks. He warned that if agreements couldn’t be made with creditors, the city would need to seriously consider bankruptcy, and eventually received approval from Michigan’s governor, Rick Snyder, last week.

“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 Snyder. “This is a difficult step, but the only viable option to address a problem that has been six decades in the making.”

Is bankruptcy good or bad for the city?

Public retirees and employees are one of the groups of creditors that are up in arms over the bankruptcy filing decision as huge concessions on repayment have already been made and further losses would likely result should this go through. Detroit is approximately $18 billion in debt and residents will likely experience substantial cutbacks in public services in conjunction with the filing.

In June, Detroit’s median home values were up 13.8 percent year-over-year according to data compiled by Zillow, and 72 percent of the homes sold during the month were sold for a gain, so the city’s housing industry is in good shape headed in to this announcement. The bankruptcy decision could be beneficial for the city if it comes up with a plan that will make good on its obligations to creditors, but it does cause concerns for groups like retirees who are depending on a full pension repayments from the city.

It is unlikely that other cities will follow suit in pursuing so dire of a financial solution; however, investors may begin to view cities as a riskier form of investment and cause them to carefully evaluate future deals with cities in a financial state similar to Detroit’s going forward.