Detroit officials are hopeful that the bankruptcy battle ahead of them will be rewarded with a more efficient and prosperous city. But the fact is, when it comes to U.S. municipal bankruptcy filings there have been few happy endings.
Just 61 local governments have gone through Chapter 9 bankruptcy since 1954 – and while the process is devoted to restructuring debt and provides temporary cash flow relief, it does not help a city enhance its revenue or economic outlook. Furthermore, cities typically lose access to capital markets in the wake of a bankruptcy.
Detroit has a very high level of debt and the bankruptcy will correct some of it; however, experts warn that an economic turnaround is unlikely. Take for example Vallejo, California, with about 116,000 people. It spent more than three years in bankruptcy from 2008 to 2011, weighed down by labor contracts and retirement benefits. The city was allowed to terminate its collective bargaining agreements, but it never renegotiated some $128 million of unfunded pension liabilities.
Both Vallejo and Stockton have seen further increases in crime after seeking protection from creditors. Stockton, with nearly 300,000 people, was granted permission to enter Chapter 9 protection in April and will file a debt-adjustment plan later this year.
The brightest post-bankruptcy story is California’s Orange County. But its 1994 bankruptcy – the largest in history at the time – stemmed from $1.7 billion in bad derivative bets.
Orange County, home to Disneyland and with median household income of more than $75,000, nearly three times Detroit’s, has suffered few lingering effects from its 18 months in Chapter 9.
The impacts of a bankruptcy on a community are often hard to predict, but oftentimes there can be a lot of anxiety in the city’s workforce and there can be a loss of confidence among its residents.
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