Detroit Faces Long Road to Economic Health

Climbing out of an $18.5 billion bankruptcy will be a tough journey for Detroit.

The city that’s been in a decline for decades tries to dust the “jewel” again
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Detroit announced Thursday it would file for bankruptcy, making it the largest American city ever to do so. Motor City has an estimated $18.5 billion in debt. The action is the first step in what could be a long and difficult climb back to economic health for a deeply troubled city.

Detroit Mayor Dave Bing spoke of the difficulties at a Thursday night press conference and also implored city residents to unite in a time of trouble.

"It's a very, very difficult day for me, as I'm sure it is for a lot of our citizens in the city of Detroit," he said, later adding, "One of the things that I want to say to our citizens is that as tough as this is, I really didn't want to go in this direction. But now that we are here, we have to make the best of it."

Kevyn Orr, the city emergency manager, said that Detroit residents should not see changes in their everyday lives.

"Nothing changes from the standpoint of the average citizen's perspective," said Orr, whom the state appointed in March to help the city deal with its fiscal troubles.

[READ: Long-Suffering Detroit Finally Turns to Bankruptcy]

That may be true for now, but the road ahead is uncertain, both for Detroit residents and for city officials. Filing for bankruptcy is only the first step in what can be a long and painful process.

"Before issues like bondholder recovery levels and what level of services city residents will experience become clear, the bankruptcy is likely to be a complicated and protracted process," wrote ratings agency Moody's in a comment on the filing.

That's because the bankruptcy has not yet been approved. To do that, the city must prove it is in insolvent, and according to Moody's, "the burden of demonstrating cash flow insolvency is extremely difficult," requiring a city to show that it can't pay its creditors on time or can't be expected to do so in the future."

Orr said he expects the bankruptcy process to last until fall 2014. While city spending cuts have yet to be decided, they could be painful. In a June restructuring proposal, Orr spoke of the need to "reduce employment costs" for city workers and listed the possibilities for reductions in vacation days, holidays, and overtime. Pension reductions and health care cuts for retirees are also possibilities.

 

Because these choices might hurt Detroit residents economically, one key hurdle that lies ahead is political.

"Filing for the bankruptcy will definitely divide the community," said Anthony Silva, mayor of Stockton, Calif., which filed for bankruptcy just over one year ago and had the unenviable record of being the largest city in the nation to ever file for bankruptcy until Thursday. Speaking to U.S. News through a spokesperson, Silva added that Detroit's residents should be "patient and also willing to roll up their sleeves."

One other potential problem Detroit could face in its bankruptcy is a lower bond rating from credit rating agencies. That could mean higher borrowing costs for the city, making an already tough fiscal situation tougher.

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Still, the most insurmountable problem facing the city is revitalizing its economy. In 1950, Detroit had just over 1.8 million residents. Forty years later, it was around 1 million, and today, it's around 700,000.

"That exodus has brought Detroit to the point that it cannot satisfy promises it made in the past," wrote Michigan Gov. Rick Snyder in a letter included with the bankruptcy petition. "A decreasing tax base has made meeting obligations to creditors impossible."

Some municipalities that have filed in the past have had momentum on their sides, says Paul Maco, a partner at Bracewell & Giuliani LLP and a former director of the SEC's Office of Municipal Securities during Orange County's 1994 bankruptcy. While Orange County had some economic momentum behind it, says Maco, that's not something Detroit shares.

"Detroit doesn't have that vitality today," he says. Yet while bankruptcy doesn't offer any answers to the city's future economic problems, it does give the city a chance at a fresh start.