Detroit Files for Bankruptcy After Years of Decline

Residents moving out, abandoned properties and a high murder rate left the city bankrupt.
17:43 | 07/19/13

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Transcript for Detroit Files for Bankruptcy After Years of Decline
This is a special room. Report from ABC news. I'm Dan -- New York witness ABC news digital special report the motor city. Ran out of gas Detroit filing for bankruptcy yesterday the largest city ever to do so. Eighteen and a half billion dollars of debt that showed no signs of decreasing. Still growing in fact and in a moment governor Rick -- and officials will be addressing. The bankruptcy issue right now wanna bring an -- -- financed it. -- -- -- -- -- -- how this plays out and what it means on for the future of Detroit but possibly for other cities around the country that might also be facing financial problems. -- eighteen and a half billion dollars of -- where this all come from but well. It's really been in the making for fifty plus years in the bottom line is -- Detroit was spending more money than they were bringing in. And that's how anybody gets into debt whether it's individual or -- city or country. I just -- communities in America we've spent more as a country that we bring in taxes Detroit is done that and they've done in a really big way. And what's happened is that since 1950. Detroit's population has shrank by 63%. These new city -- people now they have 700000. People. But the municipal workforce shrank by only an -- only 40%. And their tax base shrank by an even larger proportions -- they just get borrowing money to try to maintain services at a certain level. And unfortunately or are just the way the world has worked the last 25 years countries. CDs banks individuals -- -- able to borrow and -- effectively refinance general over that dead. -- -- Detroit has reached the end of that line and so now they're saying you know what. We're never gonna pay this debt back so we might as well file for bankruptcy take our chances in the courts so what has been the biggest cause as of the services -- and the retirement funding what of the largest creditors a trend is having debates. Well municipal bond holders of the largest creditor group and that's just yet again almost every city and state in America sells -- In order to pay for the services and then use the tax receipts to -- -- that dad. And destroyed their tax reviews and find dramatically over the years -- their population shrank. As the auto makers and went through huge restructuring and ultimately bankruptcy after 2008. And that they were the biggest industry in the city which never diversified. So when -- when auto makers news auto makers and this was starting in the 1970s and eighties. -- auto makers were a lot of trouble there really wasn't as much tax revenue being generated for the city but the city -- borrowing. -- to maintain services that people in the city come to expect. Ultimately there was also a lot of corruption and to try to mean that there is -- -- books have been written about Detroit got that this situation. Thompson there's obviously two major groups of creditors that's the bondholders and the pensioners. And -- as we see here right now with like the bondholders. Are -- about -- five cents on the dollar which is a big knock. But the pensioners there they're looking at pennies on the dollar. And and that's gonna really impact the lives of -- tens of thousands of people who work and still work. For the city of Detroit now when this filing was made yesterday at least it out every active and ever retired city worker as well as creditors there which is -- this document was in the thousands. Yeah it's a little bit that it is entering chapter nine bankruptcy and Chapter Eleven because the -- filed for chapter nine. -- chapter and is a special part of the bankruptcy crude -- -- -- that specifically used for. State and local governments and the cities like Detroit. Chapter Eleven is typically what a corporation would file under I'm and in chapter nine basically. The federal government can't step in its it was kind of like -- states -- states' rights kind of rule it's basically a bankruptcy code. For state and local governments so they can deal with the judge and their creditors without any -- -- from the federal government. Which is a good or bad thing depending on which side this -- -- you are when it comes to Detroit. All right let's go to the news comes out Detroit where you can see unless there's governor Rick -- mayor -- she's -- governor. -- Michigan. About making a statement hasn't been hearing from Detroit on -- Chapter nine bankruptcy let's listen in. And say the least. It is at best an orthodox. In terms these things were going frankly I'm surprised that they and a lot of people outraged to my appointment my -- Which have been a lot more outrage over the past and twenty years. Yes. Casino revenues casino revenues comes in an approximate 180 million dollars and we default that would have been their security interest we would not have access to that cast. We we I think we have I mean it is there's -- -- -- -- signature pages whether -- -- they've -- -- there's some other documents have to follow up on. But we have that agreement in principle and -- job. Now that -- the fact that we're running out of time I've got fifteen months left on my tenure. I promise the governor that we -- gonna you try to get this done within the timeframe is provided by the statute there's a lot of work to be done here. Even within that fifteen months to get free work streams we have to deal with the creditor interest we have to deal with the labor interest and we have to -- of operations for the city. Of the statute imposes certain obligations of me on the back -- I've got to have a two year budget. Got to look at charter reform perhaps. Their issues regarding investigations. And appointments and other contracts to -- course there's a lot of work to -- done here in fifteen months. We're dealing with sixty years of deferred maintenance and eighteen months. I can't afford to spend time running in place again and again and again to address the various is I'm here suppose suppose we don't. -- -- -- I'm sorry Hercules. Thank you Jessica question what we've said to the vendors is we're gonna work in the ordinary course are made -- made. -- -- in some -- that person now last week that they said we're gonna have a hotline. That they can call so those checks can be addressed and issues generally speaking -- going for us this talk about. The filing yesterday. Going forward in the ordinary course this businesses -- We will pay our bills in -- we may end up paying our bills will be quick to use some of the other bills that came in before we filed. We're going to try to -- the majority of those 80% I think to below 5000 dollars so we're gonna pay those especially those. That are critical vendors related health safety and welfare police -- taken us. Those that make it caught in the aftermath questions we're gonna have a hotline they can call to decide -- -- -- -- but frankly we're going to try to pay your bills on time it's. -- -- Well I'm I think the issues that we have to address regarding this the city's insolvency in the magnitude of what we tried to do in the first ninety days. -- -- put all that information out there so we want to be debating the extent of the death. What we have to address and receive we've seen have had some success with that because nobody's saying the city's not insolvent course not eighteen billion dollars -- the -- -- that. Secondly we will have an eligibility fight I suspect. In the court -- why we filed today. With our papers a request by the judges yet to be appointed. A scheduling process so that we can bring some order to the process of people who have objections will make them will respond and the -- that determination. Wants to get by that frankly because. They're too impaired classes and into two classes one is on impaired and one is going to be impaired. The security classes are going to be on impaired so we put them to decide -- that's you know mostly bond debt related to war. But -- -- is here is it's a large number but as of tonight world. And the issue that we -- is give them some level of recovery will be debated but as far as what we can do -- on the cash flows -- the city has. -- there's not a whole lot of room for movement it's not like we're gonna go from being able to create a two billion dollar note to creating a ten billion dollar -- -- -- We don't have the cash -- -- service that even if we could. So it's going to be tonight and that's why am I am highly confident we can do this with in the time that I have left during my tenure of course the best laid plans. Can go arrive once the first shot -- but we're gonna try to keep that time. -- -- -- I wouldn't say it's over the question -- the judge because they're very capital bankruptcy judges. And we have confidence that we're gonna get a good judge. So the biggest fears this whole process is making sure that we can have a great dialogue with the citizens of Detroit in my view. Because it's just as much as you said bankruptcy is a term that none of us ever want to get to this point. And one of the first things I was concerned about our people back to thank the police are gonna -- anymore or something's gonna stop. And that's why we really want to have this to reassure the citizens of Detroit. -- normal operations continue people will be paid people can do services. But I also want to emphasize. I don't view this. As a terrible answer in the sense that now is our opportunity to stop sixty years of decline. This is fundamental. Has anyone like the Detroit a five -- to go -- ten years ago fifteen years ago how long has this gone. And people had not stopped to say stop kicking the can down the road and do something. We are doing something this is the form this is the place to do it and this is the place to deal with the -- question this is the place to put a plan for improve services for the citizens. There are tremendously good things going -- Detroit outside of city government. -- support -- by resolving city government and getting out of -- path so when asked the worst case. I don't dwell on that there's a lot of hard work difficult work to do that work will get done. And we will come out with a stronger battered Detroit and a format to grow the city because the systems of this not -- the city but the state deserving. And we're gonna give -- good service. There will be the doctrine of chapter nine Escude that -- really not towards the -- -- towards a health safety and welfare of the citizens. Because that's how it should be. You know that does anybody think it's -- to have forty year old trees going through rooms of dilapidated houses does anybody think our children to walk through the streets darkened home from school at night in October. It's anybody think that -- -- called police and and not be able to come on time because there are -- calls now. So that the doctor in chapter nine is designed to address those very questions. I recognize -- a -- Even under that. Even under that admonition we are trying very hard to be fair we are asking ourselves. For -- process by judges -- -- charges -- everything. From from store stores to shipping companies mean there -- remarkably confident this regard. But to manage this process and also have everyone represented including retirees who we ask. On June 14 -- -- Some of the labor organizations -- you represent retirees and some of them said no. We want so we're gonna ask for that representation we will be fair. Even under the guise of chapter nine and the doctrine that provides for the benefit of this. Thank you very much -- So one day after filed for bankruptcy. -- as governor of Michigan there and emergency services manager Kevin or. Addressing a lot of questions today. About Detroit once the fourth largest city in the country filing. For chapter nine bankruptcy with more than eighteen and a half billion dollars in debt. Bring -- -- finances aren't asked to help bring down a little bit. -- a very passionate speech there by the governor and I know when he was elected that was certainly one of the platforms -- of the -- what's that he was tried to make in his election campaign. Was to get Detroit back on its feet and while the auto industry has -- -- turn around the city itself but I certainly been struggling as he's been saying over the past sixty years of essentially living beyond its means. The question now as you're -- filed with chapter nine and I would judge will be appointed as far as whether the city is eligible to file for chapter nine the date -- Dave down. The services police fire water things like that is that gonna change. Right well. I'm Kevin nor the governor are saying it's not that the -- the future is gonna continue to provide the services it provides today but -- I'm pretty skeptical in thinking continue to do that. I mean this is gonna impact his city's ability to raise any kind of money and tax are these are not going up in the city there are you having a hard time. You know keeping firemen and police on the roles in an emergency responders of all kinds. And so maybe in the near term. It's not -- any impact on city residents but I I think if this if and this probably will drag on the courts I think six months a year from now. It's -- -- be even grimmer situation is right that it is today which is seen something the governor has said in a news conference that some creditors and back to Detroit may actually never again. -- -- From the -- -- they have made to the city. So my question is how does a priority -- -- -- for who's going to get reimbursed and by what amounts. Brit well there's the capital structure for I see your state just like there is for our company and an accompanying years your senior creditors and then year. Debt holders. She's referred to holders and -- equity holders that's usually how the -- goes for me is how are usually the general obligation debt. Think it's paid off first. They you have bonds tied to specific revenues like sewer water and then you have other debts and pensioners he's either the bottom of the food chain so I think that's facing and how the food chain -- here. But what's -- in. And -- potentially a very big deal for Detroit is Detroit is -- the general obligation debt which is at the top. Sort of the most senior of their dad is not secured. And that's a very technical. Maybe I don't want anything but if you're a bond investor that's wait what it what he just say that can't be right because it changes the way people have thought about municipal debt since the beginning of municipal debt. I mean this is really the basis -- the -- bond industry is that general obligation debt which is the city's ability to Levy taxes against its citizens. -- is number one in the food chain and now they're saying -- a -- number one but you might get 75 cents in the dollar percent of a hundred cents on the dollar. And that could have implications far beyond Detroit. Because of the -- other states and cities out there in America who are on the verge of bankruptcy -- -- thing. If we did that look at how much money we've seen where I could be a very very big deal -- -- fox always been seen typically as a safe haven for investors right obviously the other is not anything that's that's it. -- was a stock could produce. But the same time though there was relative security and that. So when you look beyond Detroit. Are other municipality is -- -- -- saying the same thing -- they have a difficult time trying to generate any -- -- revenue from bond buyers. Well I think they're gonna have to pay higher and higher yields on their dead in order to -- the that the tradeoff you're getting ready if you think anything of bond is really -- United States of America are -- bonds are considered to see -- in the world for good or bad right or wrong and that's why you know government debt is around three half percent right now. -- so municipality. Is that it looked as a little less safe than US government but still really safe so maybe they pay 4%. If all of a sudden people are saying you know what it's not that safe after all. Then maybe these municipal municipalities these state and local governments might have to pay 6% or 8%. And then all of a sudden the economics for that and become much more difficult because you have to -- -- that dead. Just like you arrive you know it's like a credit card some credit cards they charge you 10% some charging 20% and it's a lot harder to -- up the 20% and is the 10%. So offered a state government if the difference between 6% and 3% or 84%. Is huge. And that could have major implications across the country because Detroit could now -- and -- setting the bar. Much higher in terms of the yields that -- all these state and local governments are gonna have to -- Time -- -- -- the details are going to be playing out as us now is going to be moving on to employment of a judge. To oversee this case -- even determine if this in fact that the city -- even eligible to file for chapter nine bankruptcy. Lot of details yet to still be ironed out and revealed to us Yahoo! finance is -- task thanks for joining us and of course giving us the inside insights. -- how exactly this process will work for the city of Detroit filed for bankruptcy with eight and a half billion dollars. In debt at a complete recap our For now I'm down Cutler -- work with this ABC news digital special report. This has been a special report from me.

This transcript has been automatically generated and may not be 100% accurate.

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