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The Largest Municipal Bankruptcies in U.S. History

On Thursday, the city of Detroit filed for Chapter 9 bankruptcy protection. The total value of the city’s outstanding obligations are estimated at more than $18 billion. This makes the filing easily the largest by a U.S. city in history.

While Detroit’s bankruptcy -- if the petition is not blocked -- will be the largest, is it certainly not the first major city, town, or county to file for Chapter 9 bankruptcy protection. In 2012 alone, Stockton and San Bernardino also petitioned for bankruptcy protection. Each had hundreds of millions of dollars in debt. 24/7 Wall St. reviewed the five largest municipal bankruptcies in U.S. history.

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Thursday’s bankruptcy filing is the latest chapter in the tragedy that is the city of Detroit. Once a booming manufacturing-based economy with a strong middle class, Detroit has lost more than half its population, as well as much of its valuable tax base.

In addition to poor economic circumstances, poor management can also play a critical role in ruining a municipality’s finances. Many argue that Detroit’s officials have been overspending for years, despite their severely limited and diminishing resources. In the case of Jefferson County, corruption and bets on the direction of interest rate changes by public officials marred the city's attempts to rebuild its sewer system. Orange County borrowed billions in order to purchase complex, potentially-risky assets. In both municipalities, public officials were convicted for their roles in promoting faulty deals.

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Based on data provided by Moody’s Investors Service and public records, 24/7 Wall St. identified the municipal entities with the largest principal liabilities associated with bankruptcy. In every case except for Orange County, legal proceedings are still ongoing. In the cases of Detroit and San Bernardino, the petition could be rejected by a court.

These are the largest municipal bankruptcies in U.S. history.

5. Stockton, Calif.
> Amount of liabilities: $700 million (est.)
> Year filed: 2012

Stockton filed for bankruptcy protection in June 2012 when it had around $700 million of bond debt it could not afford to pay because of other obligations. Of this total, $147 million was owed to employees participating in the state's pension program, broadly known as CalPERS. When Stockton filed for bankruptcy, it had approximately 292,000 residents, making it the largest municipality by population at the time to undergo reorganization. A year after going to bankrupt, Stockton City Manager Bob Deis told The Record that the city has cut $2.5 billion over 30 years by ending retirement contributions to city employees, negotiating new contracts with labor unions and settling expensive lawsuits, among other factors. An initiative to raise the city's sales tax, which would help Stockton raise revenue, will also be on the ballot in November.

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4. San Bernardino, Calif.
> Amount of liabilities: $1 billion (est.)
> Year filed: 2012

When it filed for bankruptcy in early August 2012, San Bernardino became the third California city after Stockton and resort town Mammoth Lakes to file for bankruptcy in the span of just several months. San Bernardino faced a $46 million budget deficit and over $200 million in unfunded liabilities to retirees for health care and pension obligations, among other problems. In all, the city claimed to owe over $1 billion in debt. However, a judge has yet to approve the eligibility of the bankruptcy petition. CalPERS, the city’s largest creditor, has argued that San Bernardino has failed to disclose key financial information in its bankruptcy filing.

3. Orange County, Calif.
> Amount of liabilities: $1.7 billion
> Year filed: 1994

Orange County declared bankruptcy in December 1994. At the time, the county had adopted an aggressive investment strategy. Attempting to make outsized gains, the county's investment fund had relied heavily on borrowings. The city then used these funds to make bets on interest rate moves and to buy complex financial instruments. The county ended up with roughly $1.7 billion in losses. The county had to lay off 500 workers as part of the cuts it had to accept as a result of its bankruptcy. Former Orange County Treasurer Robert Citron was eventually convicted of defrauding investment fund members and misappropriating assets.

2. Jefferson County, Ala.
> Amount of liabilities: $3.2 billion
> Year filed: 2011

Jefferson County, Alabama, filed for bankruptcy in November 2011 after plans to refinance an estimated $3.2 billion worth of sewer bonds fell apart. At the time, Jefferson County's overall debt was $4.2 billion. The county is currently taking steps to exit bankruptcy this year, with a plan to raise sewer rates by approximately 7.4% annually for the next four years and nearly 3.5% a year thereafter. The county recently tapped Citigroup Global Markets to help refinance $1.9 billion worth of sewer bonds, while the county commission in June announced plans with the investment banks, bond insurers and hedge funds who hold much of the county’s debt to exit bankruptcy.

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1. Detroit, Mich.
> Amount of liabilities: $18.5 billion (est.)
> Year filed: 2013

With more than $18 billion in liabilities, Detroit’s recent bankruptcy filing is the largest in U.S. history. Detroit’s problems are hardly new. The state appointed noted bankruptcy lawyer Kevyn Orr as emergency manager for the city in March, giving him the authority to sell its assets and restructure its labor deals. But already at the time, the situation looked bleak. Orr himself described Detroit as “the Olympics of restructuring,” and whatever hopes there were of saving the city were quickly wiped away as unions, retirees and lenders all failed to make concessions. Meanwhile, because of its shrinking population and past financial mistakes Detroit could not cover its debt using tax revenue.

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