Various news agencies are reporting that the city of Detroit is in the final stages of preparation to file for bankruptcy protection under Chapter 9 of the US federal bankruptcy code.  Mayor Dave Bing and the Detroit City Council have been unable to reconcile Detroit’s massive financial obligations with her dwindling revenues, leaving bankruptcy as the only viable option.

If Detroit does indeed go through with the plan, it would be the largest municipal bankruptcy in the history of the United States, with far-reaching consequences not only for the State of Michigan, but for the entire nation.  Detroit is only one of dozens of city and county governments across the United States that are having serious trouble with their finances.  Rising costs coupled with a reduced property tax base due to the depressed real estate market have hit local governments hard, with many cities and counties cutting essential services down to the bare minimum.  In cases like Detroit’s, when there are no more services to be cut, bankruptcy remains the only option. 

The process would involve restructuring of Detroit’s debts, with major debtors like labor unions and pension funds agreeing to take a negotiated settlement, and smaller debtors essentially getting nothing.  This type of settlement would leave municipal bondholders holding worthless investments.  This is unfortunate, considering that municipal bonds are typically marketed as being among the safest investments one can make.  Anyone who has a significant portion of their retirement nest egg invested in Detroit municipal bonds is likely to experience heavy losses.

Detroit is the largest city in the State of Michigan, and was once the fourth most populous city in the United States before losing three quarters of her population during the economic downturn that began in 2008 and continues today.

Detroit Mayor Dave Bing was quoted in the Detroit Free Press as saying that “he knows deeper state intervention is a possibility for the city he leads -- and possibly a municipal bankruptcy -- but he’s doing everything he can to avoid such dire consequences.” 

Others, like Detroit Treasurer Andy Dillon, were not so sure.  Today Dillon notified city officials that he will commence a 30-day review, set to begin next week.  The outcome of that review could lead to the appointment of an emergency financial manager to take over Detroit’s finances, effectively neutering the offices of the Mayor and City Council.

In order to avoid bankruptcy, Mayor Bing has stated that he intends massive layoffs of city workers, including police and firefighters.  As many as five hundred municipal workers could be laid off, some as early as next week.  Exempt from the planned layoffs are employees in departments that generate revenue for the city.

In a press conference Friday, Mayor Bing said that he would do everything that he could to avoid bankruptcy.

“I think that’s the wrong approach for the city,” Bing said. “That don’t mean it won’t happen, but I don’t believe it's the direction we should go in.”