Michigan governor Rick Snyder has approved the decision by the city’s emergency manager Kevyn Orr to ask for Chapter 9 protection, which protects financially distressed municipalities from creditors while their debts are restructured. Orr has been examining the city’s finances since he was appointed by the governor to devise a rescue plan in March.
Detroit has more than $18bn in debt and unfunded liabilities and doesn't have the revenues to meet those obligations. As well as high debts, Detroit has the highest taxes per capita in Michigan, meaning the city is unable to raise further revenue.
As a result, around 38% of all spending by the city goes to debt repayment and other obligations and, without action, this figure is expected to reach 65% by 2017.
Snyder said the bankruptcy filing was the only way ‘to provide the 700,000 people of Detroit with the public services they need and to restore the city’.
The ‘fiscal realities’ facing the city have been ignored for too long, he added. ‘This is a difficult step, but the only viable option to address a problem that has been six decades in the making.
‘The simple fact is Detroit is in a financial crisis. The city is insolvent and has been borrowing money to pay its bills for nearly a decade. Bankruptcy is the only feasible option to fix the city's finances and do what is right for the 700,000 people of Detroit,’ Snyder said.
Orr's restructuring plan for the city includes a plan for $1.25bn of investment over 10 years in public services, primarily police and fire protection, refuse collection and street lighting. Snyder said this showed that fixing the city's finances would allow for investments to improve the quality of life for city residents.
Following the announcement, the White House said that President Barack Obama and his senior advisers were closely monitoring the situation. ‘While leaders on the ground in Michigan and the city's creditors understand that they must find a solution to Detroit's serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalise and maintain its status as one of America's great cities,’ a White House spokeswoman added.
