Detroit "gut kick' poses new test for long suffering city

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Detroit Mayor Dave Bing and Kevyn Orr, the city's emergency manager, speak at a news conference about Detroit's decision to file for bankruptcy as it tries to eliminate a budget deficit and cut long-term debt. The city listed assets and debt of more than $1 billion in a Chapter 9 petition filed today in court in Detroit. Chapter 9 of the U.S. Bankruptcy Code is reserved for municipalities and differs from the rules used by bankrupt companies in Chapter 11.

Michigan Avenue's LJ's Lounge has survived its share of setbacks over the years in Detroit. The latest "is like a kick in the gut," manager Sue Wallace said.

"There's going to be a lot of people suffering" from the city's race into bankruptcy court yesterday, Wallace said in an interview. "I pray like hell we're not one of 'em"

Kevyn Orr, Detroit's emergency fiscal manager, sought protection for the Motor City under Chapter 9 of the U.S. Bankruptcy Code to deal with more than $18 billion in debt and long-term obligations. In a statement, the bankruptcy lawyer said he had "no reasonable alternative" to seeking a legal shield from creditors through the court filing.

Detroit's new status as the nation's largest municipal bankruptcy elicited reactions of sadness, hopefulness and resignation in the city and from observers around the nation.

It was inevitable, said Steven Rattner, a New York financier who headed President Barack Obama's auto-industry task force in 2009 that reorganized the predecessors of Detroit-based General Motors Co. and Chrysler Group LLC in bankruptcy court.

"It's analogous to the auto companies, in that you have too many stakeholders whose claims are too underwater to have realistically ever worked this out without some kind of bankruptcy," Rattner said in an interview. "I felt the same way about the auto companies as I did about Detroit from the first moment -- bankruptcy was the only option."

More sacrifice

GM and Chrysler each emerged from Chapter 11 reorganizations in about six weeks and have since developed popular new models and returned to profitability. Detroit won't be as easy to fix, Rattner said. It will take longer and require greater sacrifices, he said.

"You're going to have much bigger haircuts for the workers and that's going to mean much more pain than the workers for the auto companies were asked to bear."

That's what worries Wallace and other Detroiters.

"Unfortunately, some of the customers who come in here are going to suffer," said Wallace, who was born and raised in Detroit. The bankruptcy gives her a scare.

Michel Soucisse, manager of Mudgie's Deli on Porter Street, had similar concerns.

"I really fear that Detroit will be cut apart by its creditors and some of our assets will start to be sold off willy-nilly," he said in an interview.

Uninterrupted services

Orr, 55, sought to assure the more than 700,000 residents that municipal business and services won't be interrupted, at a news briefing with Mayor Dave Bing, a 69-year-old Democrat.

"Pay checks will be made, bills will be paid," Orr said. "Nothing changes from the standpoint of the ordinary citizen's perspective."

The step into bankruptcy lets the city deal with its "overbearing debt," public health and safety concerns and will allow Detroit to "move forward to a fresh start," Orr said.

Acknowledging the need for the filing, Bing said he's optimistic.

"Although we are moving into uncharted waters, Detroit has a history of fighting back during tough times," the mayor said in a statement. "Hopefully, this is the beginning of a better path forward for our city."

Union leaders complained that bankruptcy was another stomp on democracy and municipal workers.

Enough's enough

"Detroit cannot afford any further attacks on working families, who have already sacrificed so much without a say in the process," Metro Detroit AFL-CIO President Chris Michalakis and Michigan AFL-CIO President Karla Swift said in a joint statement. "It is time to put the needs of Detroit residents above the interests of out-of-town creditors."

Bankruptcy may help Detroit join the economic resurgence of other Midwest industrial cities such as Cleveland, Milwaukee and Pittsburgh, said Donald Grimes, a senior labor and economy researcher at the University of Michigan.

The move won't affect the automotive industry, though a court-ordered city tax increase may take more money from GM. (GM)

At American Coney Island in downtown Detroit, third-generation owner Grace Keros, 48, said Orr's arrival and the bankruptcy were needed to fix a city that can't provide basic services, such as street lighting or regular refuse removal.

Her restaurant's trash used to be picked up daily. About a month ago, she received a letter saying there would be no more curbside service in the area surrounding her store, which specializes in hot dogs.

A "˜blessing'

"I went and found a private company and it's working out 10 times better than the city did," Keros said, calling the disruption "a blessing in disguise."

"This was pretty much inevitable," she said, adding that the city's "dysfunction didn't just happen now" and that the bankruptcy was a good thing. "We need the police to be able to work properly. We need the fire department to work properly, and they can't. They've been hindered."

"They're in danger every day" and need help, Keros said. "If this is going to do that, then I thank God it happened. It needed to happen sooner than this."

Improving Detroit's services is the goal of the bankruptcy, as well as reducing debt and other obligations, said Governor Rick Snyder, a Republican who appointed Orr in March. Snyder, in a conference call with reporters, said the move offers "a fresh start." Michigan's biggest city has lost a quarter of its population since 2000, and more than a third of those who remain live in poverty, U.S. Census data show.

Creditors balked

Viable alternatives disappeared as creditors rebuffed Orr's June 14 proposal to eliminate $11.5 billion in unsecured debt with $2 billion in newly borrowed money, said Snyder, who authorized the filing yesterday.

Detroit's residents continue to cope with an understaffed police force that takes an average 58 minutes to respond to calls for help, compared to a national average of 11 minutes, Snyder said. Orr proposed spending $1.25 billion over 10 years to improve services, especially public safety.

"This is really an opportunity to say enough is enough," Snyder said. "We need to focus on improved services for citizens and revising the debt."

The city will emerge from court protection before the end of 2014, Orr said -- possibly within a year or so.

For state Senator Bert Johnson, a Detroit Democrat, the filing created a "surreal" moment. He had opposed putting the city under an emergency manager.

America's heartland

"This city has meant so much to the world, so much to the United States of America," Johnson said by telephone from Myrtle Beach, South Carolina, where he was attending his son's basketball tournament. Johnson said when others learn he's from Detroit, it elicits both consoling and encouragement.

Detroit has hit "rock bottom" and can bounce back, said John George, founder of Motor City Blight Busters, a nonprofit group that has led an effort for 25 years to clean up one of the city's most impoverished neighborhoods. He was helping demolish a fire-damaged home when he heard of the bankruptcy filing.

"When you get that crushing debt lifted off your back, you can actually focus and try to make some sense out of the madness," George said. "It was the obvious choice."

For Wallace at LJ's, it's another round of trouble. Her bar survived the shutdown of baseball's Tiger Stadium just up the street in 1999.

"We've been here since 1985 and we've seen a lot of ups and downs," Wallace said. "We're glad we made it this long and we hope we make it a little longer."

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