Detroit largest city to declare bankruptcy

Stockton, Calif. filed for bankruptcy on June 28, 2012 and San Bernardino, Calif. filed for bankruptcy on July 10, 2012. In neither situation was there any discussion of intervention by Gov. Jerry Brown, a Democrat, or any consideration of bailouts for the two cities.

Gov. Rick Snyder of Michigan, a Republican, has rejected calls for a bailout of the Motor City. Yet he has already been far more involved in local matters than other chief executives from other states.

In “The State Role in Local Government Financial Distress,” a report released by Pew Research Center this year, North Carolina, Michigan and Rhode Island are listed as states most heavily involved with the fiscal health of their municipalities.

North Carolina, currently led by Republican Gov. Pat McCrory, has the most in-depth involvement with its municipalities. As indicated by the report, in North Carolina “local governments submit financial data extracted from state-mandated reports by independent auditors.”

“Working with the U.S. Census Bureau, the staff of North Carolina’s Local Government Commission develops a financial profile of each city and county that is shared in a public database,” continued the report. This sophisticated system has enabled the state and most municipalities to earn the highest bond ratings in the country.

A similar effect from state monitoring may have taken place in Michigan, where after Detroit filed for bankruptcy, many local officials feared their borrowing costs would be higher as reported by the New York Times. Bloomberg Businessweek dispelled those fears, however, in its article titled “Detroit’s Bankruptcy Doesn’t Faze the Municipal Bond Market.”

Those fears were stoked by the fact, as iterated in the New York Times report, that “Detroit’s state-appointed emergency manager, Kevyn Orr, has proposed imposing deep cuts on some bondholders — treating them the same, in effect, as retired Detroit workers.” Orr “put them all at the back of the line for whatever money is available, as unsecured creditors,” read the article.

Gov. Lincoln Chafee of Rhode Island, an independent, and the state legislature did the opposite when the city of Central Falls filed for bankruptcy in August 2011. Before the city filed for bankruptcy, the state passed a law which prioritized bondholders ahead of other creditors in bankruptcy.

In Michigan, emergency managers are located in six cities, and they are the instruments used by the state government to assure financial markets that cities in crisis will be restored to health.
“Emergency managers were intended as a temporary fix for local government’s financial woes,” Professor Sarah Reckhow of Michigan State University’s Department of Political Science said in an online interview. “In this regard, the record is mixed.”

“We’ve just heard the good news that Pontiac will be returning to local control. Meanwhile, Benton Harbor has been overseen by an emergency manager for more than three years,” the professor said.

Detroit’s bankruptcy represents the first evident failure of Michigan’s system of emergency managers.

For all states, cities cannot file for bankruptcy without the state’s permission. Former Gov. Jennifer Granholm and Gov. Snyder both rejected the city of Hamtramck’s requests to file for bankruptcy the two times it asked in 2010 and 2011.

Out of the 50 states, 27 only authorize conditional bankruptcy. Another 21 states do not have a framework for cities in crisis. And the story of Detroit would have been much different if it were located in Iowa or Georgia, two states that do not allow municipalities to file for Chapter 9 bankruptcy.

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