Recent and significant Chapter 9 cases
• SAN BERNARDINO, CALIFORNIA: Filed for bankruptcy status last August 1, becoming the third city in America's most populous state during 2012 to use Chapter 9 in a fiscal crisis. The city of about 210,000 residents located 65 miles east of Los Angeles said it had more than $1 billion in debts and had tapped out its financial reserves. A federal bankruptcy judge has scheduled a hearing for August 28 to determine if the city is eligible for Chapter 9 shelter.
• STOCKTON, CALIFORNIA: The city of 300,000 located east of San Francisco filed for bankruptcy in June 2012 and was until Detroit's declaration the biggest U.S. city ever to seek Chapter 9 protection. After years of fiscal mismanagement and a housing market crash, Stockton was unable to pay workers, pensioners and bondholders. In April this year, a judge turned aside objections from bondholders trying to scuttle the case and cleared the way for Stockton to move ahead on a debt-adjustment plan, which local officials hope to file in September.
• JEFFERSON COUNTY, ALABAMA: At $4.2 billion, this county set the previous record for the biggest U.S. municipal bankruptcy filing in November 2011. The county has since negotiated a tentative settlement with most creditors that still must be approved by a federal judge. The county, home to Birmingham, Alabama's largest city, is weighed down by massive sewer-system debt. After the loss in 2011 of a local jobs tax that severely reduced revenues, the county cut 1,300 staff jobs, pulled back on government services and stopped payments on general obligation debt.
Once the very symbol of American industrial might, Detroit became the biggest U.S. city to file for bankruptcy Thursday, its finances ravaged and its neighborhoods hollowed out by a long, slow decline in population and auto manufacturing.
The filing, which had been feared for months, put the city on an uncertain course that could mean laying off municipal employees, selling off assets, raising fees and scaling back basic services such as trash collection and snow plowing, which have already been slashed.
“Only one feasible path offers a way out,” Gov. Rick Snyder said in a letter approving the move.
Kevyn Orr, a bankruptcy expert hired by the state in March to stop Detroit’s fiscal free-fall, made the filing in federal bankruptcy court under Chapter 9, the bankruptcy system for cities and counties.
Orr said Detroit would continue paying its bills and employees.
But, said Michael Sweet, a bankruptcy attorney in Fox-Rothschild’s San Francisco office, “They don’t have to pay anyone they don’t want to. And no one can sue them.”
The city’s woes have piled up for generations. In the 1950s, its population grew to 1.8 million people, lured by plentiful, well-paying auto jobs. But like many American cities, Detroit began to decline late that decade as developers starting building suburbs.
Then beginning in the late 1960s, auto companies began opening plants in other cities. Property values and tax revenue fell, and police couldn’t control crime. In later years, the rise of autos imported from Japan started to cut the size of the U.S. auto industry.
Detroit lost a quarter-million residents between 2000 and 2010. Today, the population struggles to stay above 700,000.
In recent months, the city has relied on state-backed bond money to meet payroll for its 10,000 employees.
Orr was unable to persuade a host of creditors, unions and pension boards to take pennies on the dollar to help with the city’s massive financial restructuring. If the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment.
Orr said Thursday that he “bent over backward” to work with creditors, rejecting criticism that he was too rigid. “Anybody who takes that position just hasn’t been listening.”
The bankruptcy could last through summer or fall 2014, which coincides with the end of Orr’s 18-month appointment, he said.
Snyder determined earlier this year that Detroit was in a financial emergency and without a plan for improvement. He made it the largest U.S. city to fall under state oversight when a state loan board hired Orr. His letter was attached to Orr’s bankruptcy filing.
“The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services,” Snyder wrote. “The city’s creditors, as well as its many dedicated public servants, deserve to know what promises the city can and will keep. The only way to do those things is to radically restructure the city and allow it to reinvent itself without the burden of impossible obligations.”
A turnaround specialist, Orr represented automaker Chrysler LLC during its successful restructuring. He issued a warning early on in his 18-month tenure in Detroit that bankruptcy was a road he preferred to avoid.
In June, he laid out his plans in meetings with debt holders. Some creditors were asked to take about 10 cents on the dollar of what the city owed them. Underfunded pension claims would have received less than the 10 cents on the dollar under that plan.
Orr’s team of financial experts said that proposal was Detroit’s one shot to permanently fix its fiscal problems. The team said Detroit was defaulting on about $2.5 billion in unsecured debt to “conserve cash” for police, fire and other services.
“Despite Mr. Orr’s best efforts, he has been unable to reach a restructuring plan with the city’s creditors,” the governor wrote, explaining that bankruptcy protection was “the only feasible path to a stable and solid Detroit.”
Detroit’s budget deficit is believed to be more than $380 million. Orr has said long-term debt was more than $14 billion and could be between $17 billion and $20 billion.
Orr’s decision to file now may have been influenced by lawsuits filed by some city workers and retirement systems to prevent Snyder from approving a bankruptcy request from the emergency manager, said Detroit-area turnaround specialist James McTevia.
They have argued that bankruptcy could change pension and retiree benefits, which are guaranteed under state law.
Orr has said federal bankruptcy laws trump state law in this matter.
A bankruptcy judge will stay all the litigation, McTevia said.
“One court will adjudicate all these,” McTevia said.
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