Chapter 9, or municipal bankruptcy, is the fate that awaits Michigan’s most populous city if Michigan Gov. Rick Snyder’s efforts to restructure the city fail.
Detroit, a city of 706,585 residents as recorded by the 2010 census, would be the largest municipal bankruptcy filing in U.S. history.
Stockton, Calif., a city of 291,707 residents, filed for bankruptcy in 2012. Central Falls, R.I., a city of 19,376 residents, filed for bankruptcy in 2011. Prichard, Ala., a city of 22,659 residents, filed for bankruptcy a second time in 2009 after it had already been bankrupted in 1999.
“There is probably no city that is more financially challenged in the entire United States,” Snyder said after he announced the city was in financial distress as reported by The Economist.
Economists and financial experts contend the effects of municipal bankruptcy are often widespread and cause economic distortions harmful to other municipalities as well as the state.
In the interim of bankruptcy proceedings, the county and state would most likely have to carry out and incur the cost of city services; the marketplace would demand a higher price to borrow funds at all levels of Michigan government.
As a result of the debate in Washington D.C. over the federal deficit and overall debt, states and localities face the prospect of higher borrowing cost. Currently, the interest derived from state bonds and municipal bonds is not taxed; it is an indirect subsidy for state and local governments.
Congress is considering revoking the tax-exempt status of those bonds in order to raise more revenue.
Detroit’s bonds have been rated as worthless by Moody’s Investors Service.
In an interview with CNBC in 2011, famous financier and philanthropist George Soros of Soros Fund Management said there is “going to be a lot of pain and conflict” over municipal bonds.
Since 2004—the last time the city ran a surplus—Detroit has had to borrow money to cover expenses not paid for by tax revenues. Over time, it has accumulated $14 billion in long-term debt and $6 billion in short-term debt. The city has had to borrow in order to finance day-to-day operations and also to fund its pension system and retiree health care costs.
“Thirty cities at the center of the nation’s most populous metropolitan areas faced more than $192 billion in unpaid commitments for pensions, primary health care, as of fiscal 2009,” said a recent report by Pew Research Center’s American Cities Project.
In the area of pensions, Detroit’s total unfunded liability equals $552,755 and 93 percent of the pension fund is fully funded. Portland, Oregon’s pension system has a total unfunded liability of $2.7 million, only 50 percent fully funded.
Retiree health care costs, however, have a total unfunded liability of $4.9 million; only one percent of the costs are fully funded. Cincinnati, Ohio, has 85 percent of its retiree health care cost fully funded.
Data from The Atlantic showed Michigan as a state that has reduced its contributions to localities by 5 percent or less at a time when cities like Detroit are desperately in need of revenue.
