DETROIT: In less than a month, Michigan Gov. Rick Snyder will decide whether the state will take over Detroit’s broken finances and send in someone to oversee the city’s fiscal recovery.
Regardless of Snyder’s decision, the question may not be who can save Detroit, but how can Detroit be saved.
The city’s options are limited, with experts split on what may be best: long-term, methodical restructuring with help from the state or cutting the city’s losses now through municipal bankruptcy.
Detroit, with a population of about 700,000 residents, would be the largest city to file for Chapter 9 bankruptcy if that path is taken, according to James Spiotto, a municipal bankruptcy expert at the Chicago-based Chapman and Cutler law firm.
“Chapter 9 is meant to be the absolute last resort ... when all else fails and you are no longer capable of working with the state or anyone else to bring about a resolution,” Spiotto said. “It would have an adverse effect on the credit market, not only for that municipality, but also for the state.”
About 640 Chapter 9 bankruptcies have been filed since Congress enacted a revised Municipal Bankruptcy Act in 1937.
Recent cities that have filed for bankruptcy include San Bernardino, Calif., which took that route in August after learning it had a $46 million deficit.
The largest municipal bankruptcy filing in U.S. history involved Jefferson County, Ala., which had more than $4 billion in debt when it filed in 2011. The most populous city in the United States to do so was the 290,000-resident Northern California community of Stockton, in June.
Detroit faces more than $14 billion in long-term liabilities, has a near-zero cash flow and a skyrocketing budget deficit that now is listed conservatively at $327 million, according to a state-appointed review team that looked at Detroit’s books.
“Rome fell because it went broke, and France faced a national revolution when it went broke,” said James McTevia, president of a Michigan-based firm that specializes in turnaround management. “If an emergency financial manager is not appointed immediately, the city should file for bankruptcy at once. The city’s debt needs to be restructured.”
The review team found that Detroit was in a “financial emergency” and forwarded its report to the governor. Snyder said he would carefully review the team’s findings before deciding whether to appoint an emergency manager.