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, making it the largest municipal bankruptcy filing in U.S. history by debt, estimated at $18 to $20 billion. That figure dwarfed Jefferson County, Alabama's approximately $4.23 billion filing in 2011, the previous record. Detroit was also the largest city by population in U.S. history to file for Chapter 9 bankruptcy, more than twice the population of Stockton, California, which had filed in 2012 and successfully exited bankruptcy in February 2015. 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 stretched over seventeen months before Detroit officially emerged from bankruptcy on December 10, 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 provided greater context for its financial problems. The decline of population and employment had been ongoing for decades before the bankruptcy filing.

Detroit's population decline entering bankruptcy was steep and sustained. The city fell from a postwar height of 1.85 million people to about 685,000 at the end of 2012, a collapse driven by decades of job loss, suburban flight, and disinvestment. The U.S. Census Bureau's 2020 count recorded just 639,111 residents, showing the decline didn't stop with the bankruptcy filing. 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 U.S. automobile manufacturing, and though the industry began growing again in the years before the filing, employment remained only a fraction of its historic peak.

Racial and demographic forces compounded the economic decline. Discriminatory housing policies, white flight accelerated by the 1967 Detroit uprising, and the systematic disinvestment in majority-Black neighborhoods left the city with a shrinking and increasingly impoverished tax base. Academic scholarship has connected these structural forces directly to Detroit's long-term fiscal trajectory, noting that the bankruptcy cannot be understood without accounting for decades of racially shaped urban policy.

Detroit's city operating expenses decreased by 38 percent between 2008 and 2013 through employee layoffs and reductions in employee healthcare and benefits. But debt payments, retiree healthcare costs, pension payments, and financial expenses all increased over the same period. A particularly damaging financial instrument was a set of pension obligation certificates used to finance $1.6 billion in debt. The city had borrowed approximately $1.44 billion in 2005 through arrangements with UBS and Merrill Lynch at variable interest rates, and by 2013 those obligations required costly termination payments triggered by the city's deteriorating credit rating. Detroit owed an estimated $547 million in swap termination fees to UBS and Bank of America/Merrill Lynch alone, a figure that became one of the most contentious elements of the entire restructuring.

The deterioration of city services became the most visible sign of the crisis. The average response time for a Detroit police call in 2013 was 58 minutes, compared to 11 minutes nationally. Forty percent of the city's street lights were burned out. About 78,000 vacant and abandoned structures, roughly 20 percent of the city's housing stock, surrounded residents throughout the city. These conditions were documented in Emergency Manager Kevyn Orr's June 2013 proposal to creditors, which laid out the scale of Detroit's dysfunction in stark detail.

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 helping Detroit with its finances. A financial review team was appointed in December 2012 to conduct a 60-day review. That review concluded in February 2013 with a formal state declaration that Detroit was in a financial emergency.

A unique feature of Michigan law is the ability of the governor to appoint an emergency manager to take over operations of financially distressed units of local government, ranging from school districts to entire municipalities. Shortly after the February emergency declaration, Governor Snyder appointed Kevyn Orr, a Jones Day bankruptcy attorney and University of Michigan graduate, as Detroit's emergency manager. That appointment, formalized through Executive Order 2013-7 on March 14, 2013, effectively stripped elected city officials of their governing authority. Not without controversy. Critics, including many Detroit residents and union leaders, argued the emergency manager law was undemocratic and disproportionately applied to majority-Black cities and school districts in Michigan.

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. Orr moved quickly. In June 2013, Detroit stopped making payments on some of its unsecured debts, including pension obligations. In an effort to avoid bankruptcy, Orr sought to persuade creditors to accept just 10 cents on the dollar for what 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. Those negotiations failed, and Orr proceeded with the historic Chapter 9 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 filing violated Article IX, Section 24, of the Michigan Constitution, which protects public pension benefits, and ordered Governor Snyder to withdraw it immediately. On July 23, an appeals court stayed that ruling pending Michigan Attorney General Bill Schuette's appeal. The Bankruptcy Court added its own federal stay of the state court proceedings on July 24, setting up a direct conflict between federal bankruptcy law and Michigan's constitutional pension protections.

Most U.S. municipalities can't file for Chapter 9 bankruptcy at all. A filing must be "specifically authorized" by the law of the state where the city is located, meaning states themselves control access to the federal bankruptcy courts. This threshold question dominated Detroit's early proceedings. The Bankruptcy Court set October 23, 2013, as the trial date for any objections to the city's eligibility and March 1, 2014, as the deadline for the city to file a plan of adjustment. After a nine-day eligibility trial, Bankruptcy Judge Steven W. Rhodes ruled on December 3, 2013, that Detroit was eligible for Chapter 9 on its $18.5 billion in debt. His ruling held that federal bankruptcy law superseded the state constitutional pension protections, a landmark legal conclusion that alarmed retiree advocates across the country.

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 owned an art collection that included works by Van Gogh, Rembrandt, and Matisse, acquired since the city bailed out its then-bankrupt local art institution in 1919. By 2013, the collection was the city's most valuable single asset. Both bondholders and retirees argued it would be unfair for Detroit to retain that artwork while asking creditors to accept deep discounts on what they were owed.

Chief Judge Gerald Rosen of the U.S. District Court for the Eastern District of Michigan led the mediation process that ultimately produced a negotiated path forward. His role proved essential. Without a mediated settlement, the competing claims of pension funds, bondholders, the state, and the DIA would likely have remained deadlocked far longer, at far greater cost to all parties involved.

The Grand Bargain

The resolution of Detroit's bankruptcy centered on a creative financial arrangement that became known as the "Grand Bargain." The deal brought together the State of Michigan, a coalition of major philanthropic foundations, and the Detroit Institute of Arts to raise a combined $816 million. That money served two purposes: it reduced the pension cuts that retirees would otherwise face, and it transferred ownership of the DIA's art collection to an independent nonprofit trust, placing it beyond the reach of future creditors.

The state contributed approximately $350 million. A group of national and local foundations, including the Ford Foundation, the Kresge Foundation, the Knight Foundation, and others, pledged roughly $366 million collectively. The DIA itself committed $100 million, raised through a regional millage. The Grand Bargain was approved by both Democrats and Republicans in the Michigan Legislature, a rare bipartisan achievement in a deeply polarized political environment.

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. The deal was painful, but without the Grand Bargain's outside funding, retirees would have faced far steeper cuts.

After a two-month trial, Judge Rhodes confirmed the city's plan of adjustment on November 7, 2014. Creditors and insurers absorbed losses totaling $7 billion, with creditors receiving between 14 and 75 cents on the dollar depending on the class of claim. On December 10, 2014, Detroit officially exited bankruptcy. The total bill for the city's bankruptcy professionals came to around $170 million, roughly $10 million per month. Jones Day, the city's lead bankruptcy counsel, collected over $51 million in fees alone.

Aftermath and Legacy

The bankruptcy's conclusion launched a period of measurable but uneven recovery. Roughly $7 billion in debt was wiped away, and pension payments were paused for approximately a decade, freeing up cash for city operations. Annual budgets have been balanced every year since 2014, and the city built up a $150 million rainy-day reserve fund. Thousands of broken streetlights were repaired and emergency response times improved, though Detroit continued to rank among the highest per capita violent crime rates in the country.

Mike Duggan, who won a remarkable write-in victory in the 2013 Democratic mayoral primary and took office in January 2014, became the dominant political figure of the post-bankruptcy era. Duggan was the first white mayor of Detroit in roughly 40 years. His administration oversaw substantial progress on blight removal: the Detroit Land Bank Authority's count of vacant residential structures fell from approximately 40,000 in 2014 to about 6,500 by 2023. Downtown Detroit, the riverfront, and neighborhoods like Rosedale Park attracted investment and saw visible improvement during his tenure.<ref>{{cite web |title=How is Detroit doing 10 years after it filed for bankruptcy? |url=https://www.npr.org/2023/07/18/1188244106/how-is-detroit-doing-10-years-after-it-filed-for-