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What Bankruptcy Means for Detroit Residents What Bankruptcy Means for Detroit Residents

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What Bankruptcy Means for Detroit Residents

To dig its way out of debt, the Motor City may cut pensions, increase taxes, and even sell off precious works of art.

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The Detroit skyline, as seen from Windsor, Ontario, in 1929, five years before U.S. code was amended to extend bankruptcy protection to municipalities.(Library of Congress)

A federal ruling Tuesday has taken the fight over fixing Detroit's massive debt issues—brought on by a shrinking tax base generated from high unemployment and deserting residents—out of the hands of feuding city officials and creditors and under court supervision. And it's given the city, which filed for Chapter 9 bankruptcy in July, a break from paying off its $18 billion debt while it assembles a restructuring plan for its finances.

The presiding judge called the hiatus "an opportunity for a fresh start." But the eligibility for bankruptcy protection is by no means a get-out-of-jail-free card. That fresh start requires a plan approved by all parties involved, which could spell a month- or year-long embattled process of back-and-forth negotiations. For the citizens of Detroit, that means feeling the pinch of bankruptcy for an indefinite amount of time, the long-term effects of which remain unknown. Here's what this week's ruling means for the Motor City.

 

Pensions will be cut. Tuesday's ruling would allow municipal pension cuts, even if those pensions are protected under the state's constitution. However, cuts would only be approved if the judge presiding over the case finds the rest of the plan "fair and equitable," the Detroit Free Press reports, setting the bar high for a credible plan.

Fire, police, and sanitation services will be scaled back. When a city enters bankruptcy, crucial public and maintenance services are usually the first to shrink. Personnel in sanitation services and fire and police departments will be cut. Fewer operating firehouses mean longer response times for emergencies. Maintenance of roads and public transportation sink to the bottom of the priority list, Potholes will grow larger and roads won't be paved.

So will various city departments. City employees in a number of branches of local government will see cuts in wages and benefits, and the staffers who keep their jobs will be picking up the slack for the ones who don't.

 

Taxes will increase—again. Tax hikes are not likely to sit well with Detroit residents, but for officials, they may become a necessary evil in helping to dig the city out of debt. Any measure requires a vote, and the majority of citizens must trust Detroit enough to let it pass. The city previously raised taxes as the threat of bankruptcy loomed, but such attempts failed to alleviate the city's declining tax revenue.

City assets could be auctioned off. Restructuring city finances means evaluating everything the city owns, and seeing what can be sold or privatized. In dire times, auctioning off city assets, like public parks or sanitation operations, brings in a decent stream of cash. Such bargaining chips can even include what's inside Detroit's museums and zoos, USA TODAY reported this summer—paintings and animals worth thousands or millions of dollars.

Detroit may see the beginnings of a political shakeup. The city's lawmakers may not hold office when Detroit pulls itself up out of debt. Phil Batchelor, the former interim city manager for Vallejo, Calif., which declared bankruptcy in 2008, told NPR last year, "Many of the people who were in office [in] the years leading up to it are gone. And we have new council members that have come in and helped to rebuild the city."

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