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The other morning, while perusing the UK’s Guardian, the following headline caught my attention: “Detroit accused of exaggerating $18bn debts in push for bankruptcy”

Digging in, I read that Detroit pensioners, whose benefits ballooned to a $3.5 billion liability could be cut down to 16 cents on the dollar. Go figure, the report said pensioners don’t like that very much. They argue that yes, $3.5 billion is a tidy sum of debt to pay off… but it’s only bad because the city’s income is so low.

“The real issue for Detroit” according to Walter Turberville from the Demos think tank, “is not its debts but declining revenues as a result of its rapidly falling population. The city’s had close to 2 million residents in 1950 and 714,000 in 2010. During the recession, unemployment and the property crash exacerbated Detroit’s revenue woes. Since 2008 the city’s revenues have fallen by over 20%. This year it will have a budget shortfall of $198 million.”

If there’s a budget shortfall, it isn’t for lack of city hall trying to increase revenue. In fact, it may have been revenue grabbing that was the culprit for budget shortfalls in the first place.

As I wrote in The Daily Reckoning pages back in July, when Detroit first declared bankruptcy:

Detroit was the fourth-largest city in the nation. As people left, the tax base shrunk. To keep revenue up, taxes were raised on things that couldn’t be moved out of the city limits, like property.

Because of high property taxes, people stopped improving buildings. Eventually, it wasn’t worth it to pay the property taxes. So people just left for greener pastures in taxpayer-friendly jurisdictions. (As I look out the window of my office here in Baltimore… I can’t help but see the same thing happening.)

It was a Pyrrhic victory. City hall continued to keep up revenues by raising taxes. People continued to leave with their money and businesses. Basic services like police and fire safety suffered heavy cuts — much like my mother-of-all financial bubbles scenario.

The city’s prosperity languished:

Capital

Here’s a comparison of the effective property tax rates in Detroit versus the average across 50 U.S. cities.

Expropriate

France, like Detroit also has the problem of not enough revenue. “French farmers snarled traffic into Paris as they drove tractors onto highways to protest against taxes and new regulations” wrote Bloomberg’s Gregory Viscusi earlier this week. “The action is the latest in tax revolts in France, which in recent weeks has seen horse-riding clubs, truckers and small retail outlets protesting against increased levies by President Francois Hollande’s government.”

I recall when I lived in France that the politics of debt and taxes was so ingrained in their society that there was a general strike or greve generale what seemed like every other day.

These things were so common that kids used to actually look forward to them. They didn’t even understand the issues. To them, it was an opportunity grill chorizo in the back of their trucks while blasting technopop right outside of my office on the rue Rivoli. The strikers were happy to not be working even if their strikes didn’t work. And everyone else? They were more or less annoyed that they could travel on the rue Rivoli because of it. Seems like not much has changed.

In France, the top tax rate is 75%. Back in 2011, nearly 12,000 families paid that rate… another 8,000 families paid more than 100% of their income in taxes because of a one-time levy. Maybe that explains the riots. It might also explain why in 2011, there were 10,456 Frenchmen registered as residents of Hong Kong. It used to be that the French headed westward when they wanted to escape taxes. Now, apparently Asia is increasingly becoming the preferred destination.

According to the French Consulate in Shanghai, 40% of their expatriates were working under a local contract in 2008; they were 55% in 2012. Local contracts allowed the expat to stay in the country after their work contract was up.

The larger lesson I’ve taken away from it all? Whether it’s Detroit’s population decline or French expatriation, if you expropriate them… they will go (and those left will riot). As the debt piles higher… I expect that expropriation will be the go to strategy for cash-strapped governments. Luckily for innovators, attracting capital even if the owners of it have been driven out of town.

This article originally appeared in The Daily Reckoning


A string of robberies by people “dressed as police” led the people of Detroit to believe there were “fake cops” out robbing people at gunpoint,  it turns out they were “not fake after all,” MyFoxDetroit reports:

A second officer, a 17-year veteran from Saint Clair Shores, has been arrested accused of robbing unsuspecting drivers at gunpoint.

On Saturday, Fox 2 also reported a Detroit police sergeant was arrested at the 12th precinct. A tip sent to Fox 2 helped lead to the arrests. We forwarded a photo from one scene to Detroit Police. They recognized one of their own in the photo.

More information is expected Monday during a press conference scheduled for Monday at 3 p.m.

The first incident took place at a Citgo gas station near French and I-94 on Detroit’s east side last Sunday. The clerk says two white men in a black Ford F-150 with police lights allegedly pistol-whipped customers pumping gas. The men stole cash and cell phones from their victims. A warning went out to be on the lookout for “fake cops” but it turns out those officers were not fake after all. It appears the sergeant in this case was driving his personal vehicle.

There were at least two reports of men posing as police officers and robbing unsuspecting drivers at gunpoint. The men had police badges, bullet proof vests and guns. They looked very official and police considered them armed and dangerous.

A second incident happened near Harper and 3 Mile Drive. A man says he was pulled over by three men in a unmarked Crown Victoria. The man was searched and while he answered questions, his wallet and CDs were stolen.

So, what can you do? Even police say you have permission not to stop if you don’t believe a real police officer is trying to pull you over. Instead, call 911 and ask the dispatcher for assistance. If all else fails, drive to the nearest precinct.I like this advice, that is if the police actually tolerate it (which I find it hard to believe they would).  I wonder how much revenue they could extract if every tax-slave being pulled over drove all the way to the nearest precinct to check-in.

While these cops who robbed people at gunpoint acting in an unofficial capacity have been caught, real police who do the same in their official capacity through traffic-ticket extortion will remain at large.

via informationliberation & activistpost


Last week the city of Detroit filed the largest municipal bankruptcy in American history. Cue the panic.

The media, internet, and social media exploded with predictable stories of the city’s imminent demise. There’s the shrinking population, which dwindled from a peak of nearly 2 million to 700,000 in 2012. Over and over again, we heard the the long list of other woes – mass joblessness, the sky-high murder rate, street lights that don’t work, unthinkably long waits for police and emergency services, huge numbers of vacant buildings, and neighborhoods that are all but abandoned.

Even Michigan’s own Michael Moore seemingly admitted defeat:

 

By Friday, a Michigan court ruled the bankruptcy unconstitutional, leaving the city’s future even more up for grabs.

The reality is that Detroit’s fiscal woes have been a long time in the making. They are the product of the city’s history finally catching up. They reflect much more than a revenue shortfall, or even incompetent and at times corrupt city politics. They are the product of a half century or more of white flight, the outmigration of industry, deindustrialization, sprawl, and the huge racial and class division between the city and the suburbs, all of which have been well-chronicled.

Detroit’s problems surely run deep. But beneath its fiscal problems, and all the hemming and hawing about them, lie the seeds of rebirth for the city and the broader metro region. Since the economic crisis, and perhaps somewhat before it, the first signs of recovery and revitalization, modest as they may be, are finally starting to surface.

Detroit’s problems surely run deep. But beneath its fiscal problems, lie the seeds of rebirth.

As I’ve written here on Cities, Detroit’s downtown urban core is seeing more investment, economic activity and an influx of talent than it has in decades. This revitalization is concentrated and spotty and it is far from inclusive, but it is certainly something positive, generating jobs, revenue and much-needed hope and optimism that provide a foundation to build upon.

The broader metropolitan region is home to huge assets – truly great research universities, world-class research, development and design capabilities, abundant musical and creative talent, a great global airport, and, after years of neglect, a massive effort to invest in and revitalize its downtown core.

Of course many of these assets are concentrated outside the city, in its suburbs and adjacent communities and metro areas such as Ann Arbor and Lansing. And for that reason, the real key to the city’s rebirth will depend on true regional cooperation. For too long the city and its suburbs have been beset by racial and class division, at times stoked by divisive politicians from both sides. The city’s looming bankruptcy provides the deep crisis that may at long last be the spur for the regional cooperation from the suburbs and outlying areas that long-run recovery requires.

Over the weekend, a number commentators have suggested there is a way forward beyond the city’s fiscal crisis. Here are a few of my own reasons why the bankruptcy may signal a turning point for the city and region:

A fiscal crisis and an economic crisis aren’t the same thing. Bankruptcy is a restart, not a defeat.

Detroit is not the first city on the verge bankruptcy, nor will it be the last. New York’s suffered near-bankruptcy in 1975 and has recovered in ways few could have imagined at the time. Orange County, California, also recovered after suffering the nation’s third-largest municipal bankruptcy to date in 1994.

Detroit has been in economic crisis for decades. But a fiscal crisis is a crisis of municipal budgets; It reflects a long history of decline and overspending. But it is not the same thing as an economic crisis. In fact, it is occurring at a point when the city and region’s economy actually looks to be turning upward. And it will likely help the city’s turnaround by cleaning out the fiscal mess.

The ingredients for long-run economic recovery are already present in the region. 

As a metropolitan region, Detroit has the assets needed to underpin economic recovery. While the decline of the auto industry left it reeling, the region has strengths that enable it to reposition for the knowledge economy. The broad region is home to more than 5 million people and produces nearly $200 billion in economic output.* Its economy is larger than New Zealand’s and not too much smaller than that of Hong Kong or Singapore. There are substantial concentrations of talent: about 34.5 percent of the entire metro area’s workers are members of the creative class, slightly above the national average. Its older suburbs like Birmingham, Royal Oak and Ferndale – which stand as textbook examples of mixed-used walkable communities – have concentrations of of talent and human capital that rival creative centers like San Francisco, Washington D.C., and Boston. The Greater Detroit region has also shown a persistent ability to attract global talent in the form of new immigrants – another big asset that differentiates it from many other economically hard hit metros.

“The lives of residents need just as much renovation as the skyscrapers and houses.”

The region has world-class cultural and educational institutions. Downtown there’s the Detroit Institute of Arts and Wayne State University. Much more has been concentrated in the suburbs. There’s the Cranbrook educational community in Bloomfield Hills, the great for art, architecture and design. Michigan State is in East Lansing; the University of Michigan in nearby Ann Arbor. In the last few years, Ann Arbor itself has boomed, with a high rate of startup activity and a top-tier ranking among small metros on my creativity index.

The size and scale of the region’s economy, the quality of knowledge institutions, its International airport, and openness to global talent put Detroit in a different category than other hard-pressed Rustbelt cities.

Bankruptcy is not likely to disrupt the flow of capital, technology and talent back to the urban center. 

Detroit’s urban center is seeing substantial reinvestment, spearheaded by private investors. Earlier this year I wrote about a report highlighting the revitalization of Detroit’s Greater Downtown Corridor, a 7.2 square mile region stretching north from the city’s old riverfront. The corridor includes the central business district; the trendy Corktown neighborhood; the Cass Corridor arts and cultural district; Midtown, home to Wayne State University; and Tech Town. As has been widely reported, Dan Gilbert, moved the headquarters of Quicken Loans from the suburbs to downtown in 2007. (Gilbert has invested about $1 billion dollars in Detroit real estate, including a major effort to revitalize parks and stimulate real place-making downtown). Smaller creative and tech firms are coming back to the city, many of them setting up shop at The M@dison, where venture funds, tech companies, a small Twitter office and an accelerator are located. The construction of new light rail along the corridor, with $100 million in local funding from non-governmental sources, promises to galvanize this revitalizing core and in time hopefully connect it the older, mixed use suburbs along the Woodward spine.

This area is more affluent, better educated, and more racially diverse than the rest of the city of Detroit, as I explained The Financial Times this past April:

More than 40 per cent of the young adults living there are university educated, according to a recent report, compared with 11 per cent for the city as a whole, 29 per cent for the state of Michigan and 31 per cent for the nation. The urban center is home to more than 600 new companies and draws 10.5m visitors to its leisure attractions each year.

This revitalization is powered by a new model of public-private partnership backed by local entrepreneurs, city-builders and philanthropic foundations, in tandem with community groups that are pumping billions of dollars into the urban center.

Bankruptcy is likely to have little, if any, effect on this flow of investment capital back to the core. As Detroit Venture Partners chief Josh Linkner told Venture Beat on Friday, “I’m proud to say Detroit is my hometown,” Linkner said. “It will still be my town tomorrow, the day after, and in the years to come.”

Bankruptcy can spur greater regional cooperation. 

The Detroit region has long been a case study in white flight and urban decline. In a perceptive blog post Friday, UK economist Jonathan Schifferes explained the role that the history of geographic inequality and urban-suburban divide in the Detroit area played in last week’s bankruptcy. He wrote, “Most accounts assume Detroit’s problems stem from severe de-industrialisation. This is entirely insufficient. The root cause of this is administrative geography: growing suburban wealth has mirrored urban decline.”

Earlier this year, I mapped the region’s highly uneven class geography.

detroit class map

For a time, it looked like the suburbs could essentially abandon the city, effectively replicating its functions outside it. But, today’s technology-intensive knowledge economy requires centrality and density. The suburbs can no longer prosper without the city. As I noted back in April:

One of the things that nearly killed downtown Detroit was the misguided notion that its function as a location for offices and headquarters could be transplanted to its suburbs. The region can no longer afford the outmoded and incorrect notion that it can build an alternative “downtown.”

Many of Detroit’s new generation of investors and city-builders moved their activities back to the city because they realize true regional prosperity can only come from a strong, revitalized core.

As journalist and Cities contributor Micheline Maynard pointed out Friday, this is an opportunity for Detroit’s boosters who live in the suburbs to step up. Suburbanites like to claim Detroit’s great assets: its arts and cultural institutions, its fabled music scene, its sports teams. But they haven’t wanted to pay for it. Without the city, the suburbs will have much harder time surviving and thriving.

Bankruptcy may well be the spur that may finally brings the suburbs to the table. The region can take the example of Minnesota’s Twin Cities, where seven counties have proactively shared tax bases since 1971, or the Pittsburgh-centered Allegheny Regional Asset District.

Bankruptcy shows the need for a broader, more inclusive model of urban revitalization. 

Longer-run recovery will also require addressing the widening divides revitalization is bringing to the city itself. Karen Dumas, the former press secretary for Detroit Mayor Dave Bing, wrote of this gap in an op-ed for the Detroit News last year:

On one hand, you see a “new” Detroit. Young, white, educated and employed are the characteristics of those who are taking a chance on the city.

They stand in stark contrast to native Detroiters — most of whom are African-Americans and many who are undereducated and unemployed — who have stayed and stuck it out over the years, through challenge and controversy. The native Detroiters, tired of the struggle and lack of change, see problems, while the new Detroiters — armed with energy and excitement — see possibilities.

Investment in the central business district is important, but it cannot succeed as essentially a gated city – a cluster of advantage and reinvestment walled off from adjacent areas of disadvantage, decline and despair. Bankruptcy makes it impossible to continue to ignore the widening gulf between the city’s haves and have-nots, its areas of concentrated advantage and concentrated disadvantage.

In a thoughtful email exchange with me on Friday, Maynard zeroed in on the responsibility Detroit’s revitalizers and boosters have for the broader city and its residents. “For everyone who wants to create a park downtown, there needs to be someone who’ll adopt a park in a neighborhood,” she wrote. “The lives of residents need just as much renovation as the skyscrapers and houses.”

The region is already taking some steps in this direction. The Kresge Foundation’s $150 million Detroit Future City initiative provides a broad strategic framework to strengthen and rebuild disadvantaged neighborhoods, create jobs and spur a new model of development across the city. As I noted back in April:

A new urban social compact is desperately needed to make this happen: to upgrade its underfunded schools and to train and connect more workers and residents to the new economy that is emerging downtown. The same kind of compact is needed in cities like New York, San Francisco, and even London which, while more affluent, suffer from the similar if not worse inequality.

Writing in the Washington Post, Dan Balz argued forcefully that Detroit’s bankruptcy reflects the absence of  any real federal urban policy.  It also shows us the limits of today’s urban revitalization strategies. Helping Detroit’s leaders – and all of us – see the need for a new generation of broader, more inclusive urban development strategies could be the long-lasting and most important legacy of Detroit’s fiscal plight.

Top Image: Reuters/Rebecca Cook.

*CorrectionThe original version of this story incorrectly stated the Detroit area’s economic output as $2 billion, instead of $200 billion.The story has been updated to correct this error.

 

richard florida

Richard Florida is Co-Founder and Editor at Large at The Atlantic Cities. He’s also a Senior Editor at The Atlantic, Director of the Martin Prosperity Institute at the University of Toronto’s Rotman School of Management, and Global Research Professor at New York University. He is a frequent speaker to communities, business and professional organizations, and founder of the Creative Class Group, whose current client list can be found here.

 


Detroit’s bankruptcy filing is designed to solve the city’s short-term financial crisis and give city leaders a bit of fiscal breathing room. But the city’s long-term prospects still look bleak.

Over the past 60 years, the city has lost more than half of its residents. As its tax base  declined, the city struggled to pay for basic city services. As service quality declined, the city became an even less appealing place to live and so more people left.

Really turning Detroit around will require some outside-the-box thinking. And there’s been some. Here are six big ideas to revitalize America’s most troubled city.

Jack Kemp, Detroit's savior? (AP)

Jack Kemp, Detroit’s savior? (AP)

And all the regulations: Jack Kemp, the former congressman and housing secretary, 1996 Republican vice-presidential nominee and 1988 presidential candidate, had an idea for America’s inner cities. He wanted to make them “enterprise zones,” where federal taxes and regulations were greatly relaxed, to spur outsiders to come and do business. That’s been tried to varying degrees, including a federal program creating “empowerment zones,” but why not go all the way? Eliminate all taxes for year-round residents of Detroit, with the federal government paying the cost of the abolition of state and local taxes. Get rid of zoning, parking requirements, occupational licensing and other cumbersome regulations while you’re at it. See how many businesses come.

2. Make it into a tax shelter

Sort of like the Caymans. (Roger Wollstadt/Creative Commons)

Sort of like the Caymans. (Roger Wollstadt/Creative Commons)

Delaware’s strategy of structuring its corporate tax code to favor corporate headquarters has brought billions of dollars of investment into the state. It’s possible to do that with catastrophic insurance reserves, as a former insurance commissioner once proposed for the District. They’re currently taxed as income in the United States, so tens of billions of dollars are sitting in bank accounts in Bermuda and the Cayman Islands. If the federal government allowed Detroit to host that money at a much-reduced rate, it could create a small but significant financial industry to manage it.

3. Create a Detroit Visa

(bigstockphoto)

(bigstockphoto)

What Detroit needs, more than anything else, is to replace the million people it lost over the past six decades. The easiest way to do that would be to import them. Most Americans don’t want to live in Detroit. But as Matt Yglesias has noted, there are about 165 million foreigners would like to become Americans. Presumably some of them would be willing to live in Detroit if that’s what it took to get a green card.

The proposal would work like this: Immigrants would get a visa that would be good for five years, during which they’d be required to maintain residence within the city limits. After that, immigrants would get normal green cards and could live where they liked. But hopefully, as they put down roots and Detroit as a whole prospered, many would choose to stay.

It might seem like these new Detroiters would have trouble finding work, but population growth tends to create job opportunities. Immigrants tend to be highly entrepreneurial; some of them would not only create jobs for other immigrants, but for some native-born Americans too.

4. Go vegan

Save pigs, save money? (People for the Ethical Treatment of Animals Facebook page)

Save pigs, save money? (People for the Ethical Treatment of Animals Facebook page)

The People for the Ethical Treatment of Animals have a proposal, too. They say they’ll give the city $100,000 to make all meals in government buildings — mostly schools, hospitals and jails — meat free. As if that weren’t enough, they’ll also plaster trash and fire trucks with vegan-boosting advertisements, supporting a strapped public transit system. PETA President Ingrid Newkirk notes that vegans are less prone to obesity, which would lower health-care costs. And think of the chickens! “I don’t know if you know, but twenty thousand chickens an hour being killed for Detroit,” Newkirk says. “So if we could make all government workers try a vegan diet, that’s a lot of chickens not having their throats cut.”

5. Move federal workers to Detroit

The federal buildings in DC are ugly. We can do better. (Photo by NCinDC)

The federal buildings in D.C. are ugly. We can do better. (Photo by NCinDC)

Another way to increase Detroit’s population would be to move federal workers to the city. There’s a precedent for this: the U.S. Patent and Trademark Office opened a satellite office in Detroit last year.

The feds could do this on a larger scale. There are about 2.7 million federal civilian workers. If 10 percent of them moved to Detroit over the next decade, that would be an extra quarter-million people. Many workers would bring their families with them, and their spending would create additional jobs in the city.

Federal agencies could open satellite offices in Detroit and require most new federal workers to work there. Existing workers could be offered financial incentives to relocate voluntarily. Detroit’s extremely low cost of living would be an added draw. And not only would this help to save Detroit, but the federal government would save money on office space.

6. Give Detroit to Canada

President Obama and Canadian Prime Minister Stephen Harper (Charles Dharapak/Associated Press)

President Obama and Canadian Prime Minister Stephen Harper (Charles Dharapak/Associated Press)

Detroit is one of the few parts of the United States (other than Alaska) that’s actually north of Canada: The city of Windsor, Ontario, lies south of it. So why not make this Canada’s  problem? Much of the city’s fiscal problems boil down to retiree benefits. For example, it has $5.7 billion in unfunded retiree benefits and $3.5 billion in unfunded pensions. Luckily, Canada has a single-payer health-care system and not one but two publicly funded pension systems. Let those pay off the debt!

Canada’s provinces do more for municipalities than our states do for cities. Toronto gets 19 percent of its budget from the Ontario and Canadian federal governments. That’s much more than U.S. cities typically get. Ontario’s generally in better shape than Michigan, which is good news for tax money going to Detroit. Toronto and Ottawa are better cities to have helping you out than, say, Flint.

via Ezra Klein at wonkblog


Michigan governor laments lowest point in city’s history after emergency manager fails to broker deal between city’s bondholders and pension funds.

Sinking under huge debts and decades of mismanagement, Detroit formally filed for bankruptcy on Thursday, becoming the biggest US city ever to take such a drastic measure.

Kevyn Orr, Detroit’s emergency manager, took the decision after failing to broker a deal between the city’s bondholders and its pension funds.

The filing sets a new record for municipal bankruptcies and dwarfs the previous record filings by Jefferson County, Alabama, and Stockton, California. No other city of Detroit’s size has ever gone bust.

Orr and the city’s creditors and pensioners will now begin a fraught legal  consultation period while a court determines whether the city is eligible for “chapter 9″ bankruptcy protection for its $18.5bn debts and liabilities.

In a letter posted with the filing, the Michigan governor Richard Snyder confirmed he had received Orr’s request to start the bankruptcy proceedings. He said it was “clear that the financial emergency in Detroit cannot be successfully addressed outside of such a filing, and it is the only reasonable alternative that is available.”

Snyder said he hoped the bankruptcy would be the beginning of the end of Detroit’s woes. “This decision comes in the wake of 60 years of decline in the city, a period in which reality was often ignored. I know that many will see this as a low point in the city’s history. If so, I think it will also be the foundation of the city’s future,” he wrote.

The governor painted a picture of a city in collapse. Citizens wait 58 minutes for the police to respond to calls, compared to a national average of 11 minutes.  Only a third of ambulances were in service in the first quarter of 2013. There are approximately 78,000 abandoned buildings in the city. The unemployment rate had nearly tripled since 2000 and the homicide rate was at its highest level in 40 years, he said. Detroit is unable to meet its most basic obligations to its residents, let alone its creditors.

“The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services,” Snyder wrote.

Orr had set out a restructuring plan in June for the city, which has been plagued by corruption and plummeting revenues for years. But pension groups and bondholders balked at the terms. This week, pension funds objecting to Orr’s plan sued to stop him from making the move.

At a press conference in Detroit on Thursday evening, Orr said the city’s debts were currently claiming 38 cents on every $1 it receives in revenue. That figure would rise to 65 cents by 2017. “This is the right thing to do,” he said of the bankruptcy filing.

The White House said it was monitoring the situation but stopped short of offering any federal aid. Spokeswoman Amy Brundage said: “While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities.”

Matt Fabian, the managing director of bond expert Municipal Market Advisors, said the filing had been widely anticipated. “Detroit’s story has been terrible for 50 years. This is just the latest terrible thing to happen.”

He said bankruptcy would allow Orr to renegotiate government contracts and other broad powers to impose draconian costs cuts. But he warned bankruptcy was not an easy path. “This will make it hard for the city to conduct day-to-day business. It will drain a lot of time, it could put people off moving businesses to Detroit and it could last for years,” he said.

Other major cities have teetered on the edge of bankruptcy, including New York in 1975, Cleveland in 1978 and Philadelphia in 1991. But all brokered deals rather than face the dire consequences of going bust. “Detroit has severe difficulties, but this would be an extraordinary event,” said James Spiotto, a chapter 9 expert and head of the bankruptcy unit at Chicago’s Chapman & Cutler, before the bankruptcy was confirmed.

If the filing is approved, Detroit’s cost of borrowing will soar and the city will struggle to raise cash, Spiotto warned. Meanwhile, officials would spend years battling in the court over who is owed what. “Chapter 9 is time-consuming, expensive and uncertain,” Spiotto said.

Orr has said bankruptcy was not his preferred option. But as talks foundered, his options narrowed. His original plan was to slash benefits to retirees, including pensions and healthcare, and cut already minimal services to the bone. Police and firefighters who retire before age 55, for example, would get no healthcare under one proposal. Bondholders would have received cents for every dollar in debt they hold.

Municipal bonds have traditionally been viewed as among the safest available investments. When Central Falls in Rhode Island went bust in 2011, the state passed a law giving bondholders priority over other creditors, including retirees. Detroit’s investors must now be wondering whether bankruptcy would give them a better deal.

Neither side was willing to sign up for Orr’s settlement.

This week, the city’s two pension boards – the General Retirement System and the Police and Fire Retirement System – sued Orr and Michigan governor Rick Snyder in an attempt to block a bankruptcy.

“It appears imminent the governor will grant the emergency manager the unconditional power to proceed under chapter 9, and the emergency manager will seek to have the city’s pension debts impaired unless the retirement systems and their participants accept the emergency manager’s unilateral imposition of significant impairments to their accrued financial benefits,” the lawsuit says.

Orr was appointed in March after Snyder declared a “financial emergency” in Detroit. A lawyer and University of Michigan alumnus, Orr helped steer Chrysler out of bankruptcy, but this is a dilemma of an altogether greater magnitude.

Even after years of decline, Detroit remains the US’s 18th most populous city. The city’s finances may have hit an all-time low but its business is bouncing back. The car firms that made the city are back in rude health, and downtown Detroit is being revitalized by new businesses.

Some local business leaders believe that the city has already hit rock bottom, and that a stronger Detroit is already emerging. Dan Gilbert, founder of the Quicken Loans lender, has rebuilt downtown and encouraged new businesses and old to move into the city. In a recent interview with the Guardian he said he is “finally going to do what needed to be done if not in the last several years then in the past decades. It’s essentially good news for the city because it means this period is coming to an end.”

But for Detroit’s poor, bankruptcy is likely to make life even harder in the short term. About 60% of Detroit’s children live in poverty. Orr had planned to bus creditors to some of the city’s poorest areas so they could see what was at stake. Armed security would have gone along for the ride.

“If they can see what it’s like for Detroiters, what they endure every day in this city, I think they’ll begin to understand what’s at stake,” Orr told the Detroit Free Press. The tour was canceled as bankers became worried about the PR impact of captains of finance touring the city’s poorest neighbourhoods.