Someone Call A Tow Truck, Detroit Files For Bankruptcy

Across all of the major news wires it is being reported that Detroit has filed for Chapter 9 bankruptcy protection. According to Bloomberg:

Two Detroit pension funds sued the city’s emergency manager and the governor of Michigan, asking that a court find a bankruptcy filing would conflict with the state’s constitutional protection of public retirees’ rights.

The General Retirement System and the Police and Fire Retirement System of the City of Detroit filed the lawsuit yesterday in state court in Ingham County, Michigan, seeking a judgment that Governor Rick Snyder can’t authorize a bankruptcy filing that could reduce pension benefits.

Source: Link

Though the filing was highly anticipated, the news makes me wonder if this is not the beginning of Meridith Whitney’s 2010 prediction for “‘significant’ municipal bond defaults, totaling ‘hundreds of billions’ of dollars in losses.” Though some will argue that the filing was a long-time coming for a town that had lost its way, and that the news will have little effect on the rest of the economy, then one should not forget that the “Motor City” was once the pride and joy of the American engine of manufacturing (pun intended) that brought a great deal of prosperity to a great number of people.

If Detroit is successful in moving forward thorough bankruptcy it will serve as a guide and, possibly, an inspiration for other local governments that wish to hit the “Reset Button.” Certainly, other local governments have filed for bankruptcy and not much has come from the filings. Since 2008, the following municipalities have filed for bankruptcy protection:

  • Gould, Arkansas (Dismissed)
  • Vallejo, California
  • Westfall Township, Pennsylvania
  • Village of Washington Park (Dismissed)
  • Town of Moffett, Oklahoma
  • Prichard, Alabama
  • Boise County (Dismissed)
  • Central Falls, Rhode Island
  • Harrisburg, Pennsylvania (Dismissed)
  • Jefferson County, Alabama
  • Stockton, California
  • Town of Mammoth Lakes California (Dismissed)
  • San Bernardino, California

Source: Link

As one can see many of the filing were dismissed; however, the trend seems clear — more and more (and bigger) municipalities have been looking into the possibility of reducing (or outright eliminating) creditor liabilities and pension obligations through bankruptcy protection . Though, as in many of the other cases, Detroit’s filing may be dismissed, this will undoubtedly have a deleterious effect on  Detroit’s ability to borrow, and it is certain to put a dent in the morale of many people — especially those in public service.

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