Facing a gloomy economic outlook and a huge amount of public sector debt, local government officials in Detroit have offered creditors ‘pennies on the dollar’ in an effort to reduce the city’s debts. Kevyn Orr, a bankruptcy specialist tasked with the job of improving the city’s finances, is heading efforts to turn the city around.
Detroit is one of the United States’ most indebted cities, with local economic growth slow and government spending ‘out of control’ according to experts. The city, which was once a major centre for the United States economic boom, has faced a period of sluggish economic growth since the United States automotive industry declined.
Orr offered many of Detroit’s creditors as little as 10 cents on the dollar in payments for bonds on social security and pension liabilities. Detroit’s debt totals $17 billion – a figure that, according to many in the region, is the result of irresponsible spending by local governments and an economic strategy that’s simply uncompetitive.
The plan is an aggressive approach to turning Detroit’s economy around. Mr. Orr has stated that cuts to Detroit’s budget will not be enough to help the ailing city, and that many of the city’s former financiers – large Wall Street banks, in particular – need to lower their repayment expectations and accept a compromise.
Social spending obligations, including pensions and social security, will cost Detroit as much as 65 percent of its total budget in coming years, putting the government in severe financial straits. The city’s recovery plan would include a great deal of public spending on infrastructure aimed at increasing employment and improving the city.
Other options would include moving the city’s water supply over to a public agency in the region, as well as reducing overall public spending. Cities in similar situations to Detroit’s current predicament, such as New York City in the mid-1970s, have used similar tactics to avoid filing for bankruptcy.
