Once the fourth-largest metropolitan area in the United States, the city of Detroit filed for bankruptcy last Thursday afternoon. The Motor City, birthplace of the automotive industry, now holds the record for the largest city in American history to file for municipal bankruptcy, both in population size and amount of debt.
A 2012 estimate from the U.S. Census Bureau placed the population of Detroit at 701,475, and Kevyn Orr, the city’s appointed emergency financial manager, has stated that the city’s financial liabilities could be as high as $20 billion. These figures dwarf even the second highest municipal bankruptcies on both fronts.
Mike Maciag, data editor at Governing.com, which has been tracking municipal bankruptcies, said: “If you look at all the cities, towns, and counties that have filed, there’s usually one thing that’s the driver of it,” citing the lawsuit in Mammoth Lakes and sewer debt in Jefferson County. “Detroit is unique in that it’s more than just one factor.”
One important aspect to consider is the stigma of bankruptcy, which Maciag noted is different in Detroit’s case.
“Obviously, their debt is over 18 billion dollars,” he said, “but a lot of people were aware of the problems Detroit was having. Nationally, it was a well-known issue, and I think they already had that stigma, so it might not have been as much of a detractor.”
For context, here are a few other cities and counties that have filed for bankruptcy in recent years:
1. Stockton, California
Prior to Detroit’s announcement, Stockton, Calif., was the largest city by population to file for municipal bankruptcy with 291,707 residents. They filed in June 2012, with the housing market collapse and unsustainable pension programs largely to blame for a $26 million deficit (and over $800 million in unfunded benefits). A judge ruled in April that Stockton can move forward with a debt adjustment plan that city officials are hoping to file in September. Experts have drawn on Stockton’s situation to map out Detroit’s future. One effect of the financial recovery process was the reduction in Stockton’s police force by 26 percent, leading to record crime rates.
2. Jefferson County, Alabama
Jefferson County, Ala., is now second in financial liabilities when it comes to municipal bankruptcy, with $4.23 billion in debt at the time they filed in 2011. Jefferson County Commissioner Joe Knight noted that Detroit’s filing is “nothing to celebrate. We’re still in bankruptcy,” having just filed a financial plan earlier this month to end their bankruptcy by November. Over $3 billion of Jefferson County’s debt is specifically in sewer system-related warrants, with the 2011 loss of an occupational tax generating $66 million per year also serving as a contributing factor.
3. Mammoth Lakes, California
Mammoth Lakes Land Acquisition was the largest creditor for this small mountain resort town with a population of 8,200 and an annual operating budget of $19 million, when they sued the town in 2006. The company accused Mammoth Lakes of breaching their 1997 building contract, and the judge ruled in favor of the company, to the tune of $43 million. The ruling forced the city into bankruptcy in July 2012, but the city and company reached a settlement in September of last year thanks to “court-established mediation,” according to a statement from the city.
4. Vallejo, California
A former U.S. Navy town with over 100,000 residents, 30 miles north of San Francisco, Vallejo, California, faced $16 million in debt when filing for bankruptcy in May 2008. A decline in property tax revenue and an increase in city personnel costs contributed to the deficit, but in July 2011, the city won court approval for its financial plan to end their period of bankruptcy. Four years before Stockton’s filing, Vallejo served as a foreshadowing of the effects of bankruptcy in California, with cuts to public services leading to increased crime and prostitution, a credit rating decline, and pension battles with labor unions. A similar situation fell on San Bernardino, California, when it filed for Chapter 9 bankruptcy in August of last year (as the third California city to do so in two months).
5. Central Falls, Rhode Island
The city of 18,000 on the outskirts of Providence, R.I., faced many of the same issues plaguing California towns going under, in the form of $80 million of unfunded pension and benefit liabilities. With an operating budget of $17 million, the city filed for bankruptcy in August 2011, and won court approval of their exit plan last September after 13 months in bankruptcy. The Central Falls case is an important example of the financial finagling involved in municipal bankruptcies, particularly when it comes to negotiating with labor unions. Bondholders in Central Falls are fully repaid under their plan, and Governor Lincoln Chafee acknowledged in a statement that, “None of this would have been possible without collaboration on the part of the legislature, the unions, the city employees and the retirees.”
6. Orange County, California
The infamous OC filed for bankruptcy in December 1994, after county treasurer Robert L. Citron funneled borrowed public funds into high-risk investments (at a psychic and mail-order astrologer’s recommendation, according to the grand jury that indicted Citron for securities fraud and misappropriating funds). The investments were heavily dependent on then-low interest rates. When rates went up, the county faced a loss of 1.64 billion dollars in public funding and a possible billion dollar default the following year. After the loss of over 1,000 jobs and 200 million dollars in spending cuts, Orange County emerged from bankruptcy 18 months later.
7. Harrisburg, Pennsylvania
Pennsylvania’s capital city attempted to file for municipal bankruptcy in 2011, after lower property tax income and high pension costs gave way to massive deficits. The purchase of an upgraded trash incinerator failed to return profits and all in all, the city was hit by $320 million in debt. State law however, prohibited the bankruptcy filing, and the city is now under a ban on filing, and state receivership. In order to finance their debts, the city is selling off assets, including western artifacts purchased by former mayor for nearly $8 million in an attempt to establish a Wild West museum. With a population of 49,500, 30% of Harrisburg’s residents live in poverty and the city can’t afford to fix the 41 dangerous sinkholes throughout the city.
All in all, as unfortunate as these situations are, it’s worth noting that municipal bankruptcy filings are actually relatively rare, with only 1 out of every 1,668 eligible localities (.06 percent) filing for bankruptcy in the past five years, according to Governing.com. This is in comparison with 389,278 commercial bankruptcy filings during that same time period.
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