1 - Antecedents to Bankruptcy

Summary

Introduction

On July 18, 2013, Kevyn Orr, the Emergency Manager appointed by Rick Snyder, the Republican Governor of Michigan, made the legal decision to declare the City of Detroit bankrupt. According to Bloomberg News (2013), Orr rushed the $18 billion bankruptcy petition into federal court on July 18 just minutes before a State judge could stop him. The decision by the Emergency Manager made the City of Detroit the largest city in the US to experience bankruptcy.

This chapter examines the historical, economic, social, demographic, racial, and non cooperative relationship between the State of Michigan and the City of Detroit that led to the bankruptcy decision. There is evidence to suggest that the seeds of Detroit's bankruptcy were planted over time by the actions of investors, who reduced their investments in the city and increased investment in the suburbs over a period of 60 years (Darden et al, 1987). These actions resulted in increased unemployment in the city, the outmigration of the white middle class, a decline in property values, an increase in housing abandonment, and a reduction in tax revenue for city services (Gillette, 2014). Instead of financial assistance from the State, Detroit, like other cities in Michigan, was faced with a reduction in revenue sharing (Lavelle, 2014; Sapotichne et al, 2015). Such disinvestment by the private sector and a reduction in revenue sharing by the State made the financial problems of the city very difficult to solve (McFarland and Pagano, 2014).

Instead of providing the financial support needed, the Governor used a new, stronger Republican-passed Emergency Manager Law in 2011 to remove the democratically elected African American mayor and city council from power (Pew Charitable Trusts, 2013). The Governor then appointed an Emergency Manager to govern Detroit. The Emergency Manager served on behalf of the Governor, who made the final political decision to declare bankruptcy.

What led to the City of Detroit's bankruptcy?

The cause of Detroit's bankruptcy can best be understood by tracing the city's decline in population and economic status after 1950. The auto industry, which was concentrated in the city, made Detroit a very wealthy city in 1950 (Darden et al, 1987). Detroit has been declining in terms of population and socioeconomic status since 1950 (Darden et al, 1987; Orr, 2013b). The key factors that led to this decline will be given subsequently.