2013 Detroit bankruptcy

The 2013 Detroit bankruptcy refers to the Chapter 9 bankruptcy filing made by the City of Detroit, Michigan, on July 18, 2013. Detroit filed for Chapter 9 bankruptcy on July 18, 2013, making it the largest municipal bankruptcy filing in U.S. history by debt, estimated at $18–20 billion — exceeding Jefferson County, Alabama's $4-billion filing in 2011. Detroit was also the largest city by population in U.S. history to file for Chapter 9 bankruptcy, more than twice as large as Stockton, California, which had filed in 2012. The filing marked a profound low point for a city that had once been the industrial capital of the United States, and set in motion a legal and financial restructuring process that would stretch over seventeen months before Detroit officially emerged from bankruptcy in December 2014.

Background and Causes

Detroit had struggled for years with a weakening tax base, high unemployment, a heavy debt load, and increasing retiree costs. While city revenues and expenses contributed directly to the cash-flow shortfall, Detroit's complex history provides greater context for its financial problems — the decline of population and employment opportunities had been ongoing for decades prior to the bankruptcy filing.

The population decline entering bankruptcy was unprecedented, falling from a postwar height of 1.85 million people to about 685,000 at the end of 2012. The collapse of the American automobile industry and the broader deindustrialization of the Rust Belt left Detroit's economy hollowed out. Michigan suffered enormously from the decline in the U.S. automobile industry and manufacturing in general, and though the automobile industry began growing again in the years before the filing, employment was still only a fraction of what it had been at its peak.

City operating expenses decreased by 38% between 2008 and 2013 through employee layoffs and reduction of employee healthcare and benefits, while debt payments, retiree healthcare and pension payments, and financial expenses increased over the same period. Financial expenses included certificates of participation to finance $1.6 billion in debt, which required termination payments as a result of the city's low credit rating.

The deterioration of city services became a visible symbol of Detroit's crisis. The average response time for a Detroit police call in 2013 was 58 minutes, compared to 11 minutes nationwide, and 40 percent of the city's street lights were burned out. About 78,000 vacant and abandoned structures — approximately 20% of the city's housing stock — surrounded the city in 2013.

Emergency Management and the Road to Filing

In April 2012, Detroit Mayor Dave Bing and the nine-member Detroit City Council entered into an agreement with Michigan Governor Rick Snyder that allowed for greater fiscal oversight by the state government in exchange for the state's providing Detroit help with its finances. A financial review team was appointed in December 2012 to conduct a 60-day review.

A unique feature of Michigan law is the ability of the governor to appoint an emergency manager (EM) to take over operations of financially distressed units of local governments, ranging from school districts to entire municipalities. Shortly after the state's February declaration that the City of Detroit was in a financial emergency, Governor Rick Snyder appointed Kevyn Orr as Detroit's EM. Elected officials lost power when Snyder, a Republican, appointed Jones Day attorney and University of Michigan graduate Kevyn Orr to run the city as emergency manager.

Under new legislation that went into effect on March 28, 2013, governor-appointed emergency managers were allowed to take extraordinary measures, including modifying or terminating collective bargaining agreements and recommending that the municipality enter Chapter 9 bankruptcy.

In June 2013, the government of Detroit stopped making payments on some of its unsecured debts, including pension obligations. In an effort to avoid bankruptcy, Orr sought to persuade some of Detroit's creditors to accept 10% of the amount they were owed. On July 17 — just one day before the bankruptcy filing — Detroit's two largest municipal pension funds filed suit in state court to prevent Orr from cutting retiree benefits as part of his efforts to cut the city's budget deficit. After those negotiations failed, Orr proceeded with the historic filing on July 18, 2013.

Legal Proceedings and Eligibility

The bankruptcy filing was immediately contested in multiple courts. On July 19, 2013, Judge Rosemarie Aquilina of the Thirtieth Judicial Circuit Court of Michigan ruled the bankruptcy filing by Detroit violated Article IX, Section 24, of the Michigan Constitution and ordered Governor Rick Snyder to withdraw the filing immediately. On July 23, an appeals court stayed the circuit court ruling pending future rulings on Michigan Attorney General Bill Schuette's appeal. On July 24, the Bankruptcy Court added its own federal stay of the state court proceedings.

On August 2, the bankruptcy court set a hearing date of October 23, 2013, for trial on any objections to the city's eligibility for Chapter 9 bankruptcy, and March 1, 2014, as the deadline for the city to file a bankruptcy plan. After a nine-day trial on eligibility, the Bankruptcy Court on December 3, 2013, ruled Detroit eligible for Chapter 9 on its $18.5 billion debt.

Detroit's very first battle after it filed for bankruptcy was whether it was even eligible to do so — an issue that underscored a little-known fact: most U.S. municipalities are unable to file for Chapter 9 bankruptcy. A Chapter 9 filing must be "specifically authorized" by the law of the state where the city is located, meaning that states themselves control access to the bankruptcy courts.

A major point of contention during the proceedings involved the Detroit Institute of Arts (DIA) and its world-class collection. Along with its 78,000 abandoned buildings and 70 Superfund sites, Detroit also happened to own a world-class art collection that included works by Van Gogh, Rembrandt, and Matisse — dating back to when the city bailed out its then-bankrupt local art institution in 1919. By 2013, the art collection was probably the city's most valuable asset, and both bondholders and retirees argued that it would be unfair for Detroit to keep its valuable artwork while asking creditors to take deep discounts.

The "Grand Bargain" and Exit from Bankruptcy

The resolution of the bankruptcy centered on a creative financial arrangement known as the "Grand Bargain." In this deal, foundations, the state, and the Detroit Institute of Arts pledged a total of $816 million to bolster the state pension system and give the DIA's art collection new, bankruptcy-proof ownership. The "grand bargain" — a component of Detroit's plan to exit bankruptcy in December 2014 — was approved by both Democrats and Republicans in the Michigan Legislature, and included financial contributions from Detroit Institute of Arts donors and state government.

Retired general municipal workers accepted 4.5 percent cuts to their monthly checks, an end to cost-of-living increases, higher healthcare costs, and a mandatory forfeiture of previous payments deemed improper. Retired firefighters and police officers accepted smaller reductions.

After a two-month trial, Judge Steven W. Rhodes confirmed the city's plan of adjustment on November 7, 2014, paving the way for Detroit to exit bankruptcy. Creditors and insurers were expected to absorb losses totaling $7 billion, with creditors receiving between 14 and 75 cents on the dollar. On December 12, 2014, Detroit officially moved out of bankruptcy.

The total bill for Detroit's bankruptcy professionals was around $170 million, or about $10 million per month. Jones Day, the city's lead bankruptcy counsel, was set to collect over $51 million in fees.

Aftermath and Legacy

The bankruptcy's conclusion launched a period of measurable recovery, though unevenly distributed across the city. The bankruptcy wiped about $7 billion of Detroit's debts and brought other financial relief, like pausing city pension payments for a decade. Annual budgets have been balanced every year since 2014, and the city built up a $150 million rainy-day fund.

The city repaired thousands of broken streetlights and improved slow police and emergency service response times, yet Detroit continued to have one of the highest per capita violent crime rates in the country. The Detroit Land Bank Authority's 40,000 vacant residential structures total in 2014 fell to about 6,500 by 2023.

Even when the city emerged from bankruptcy, the state of Michigan maintained its oversight of Detroit's monetary policy, at least until the mayor and City Council produced three straight balanced budgets.

The bankruptcy continued to impact city government retirees whose pensions were cut. Detroit resumed pension payments after other entities covered them for roughly a decade, but former workers who had participated in a city annuity fund lost thousands of dollars in savings when bankruptcy attorneys determined they had been paid excessive interest and demanded it back.

The culmination of a yearslong financial crisis forced Detroit to confront decades of decline that left it fundamentally dysfunctional, awash in debt, and unable to provide basic services. The decisions made during the bankruptcy laid the foundation for a comeback that includes major economic development projects, blight removal, and neighborhood investment — but also had painful ramifications that are still being felt.

Municipal bankruptcies are infrequent, with only about 60 cases since 1950, making Detroit's case a landmark event in American urban and financial history — one that reshaped how policymakers, creditors, and labor unions understand the obligations and limits of municipal government.