THE BLOG
07/19/2013 04:53 pm ET Updated Sep 18, 2013

Bankruptcy in Detroit: Pain and a Ray of Hope

by Bob Williams and Cory Eucalitto, State Budget Solutions

There's no sugar coating it; Detroit's decades of failed political leadership and utter mismanagement caused the largest municipal bankruptcy in American History. The price will be real pain for citizens and everyone who loves the "Motor City."

But, for Detroiters this filing also represents real hope. There is now a way forward for Detroit and a valuable lesson to municipalities across America. Chicago, take heed...

According to Kevyn Orr, Detroit's state appointed Emergency Manager, outstanding obligations total $15 billion. This includes a completely unfunded $5.6 billion retiree healthcare liability. Detroit's unfunded public pension liability, State Budget Solutions found, is at least $3 billion. These challenges have grown from failure of political leaders to adapt to the needs of a population that has fallen from a high of 1.8 million to just 700,000 today.

The Chapter 9 bankruptcy process is long, and complicated. Not many understand it, given its rarity. Between 1980 and 2010, there were just 239 filings. Since January 2010, there have now been 36.

Once a bankruptcy court approves Detroit's filing, the city, will receive protection from creditors while it crafts a debt adjustment plan. Obviously, this plan will include modifications to the terms of outstanding debts -- a harsh reality for creditors of all stripes, including retirees and employees. Where previously it had not been possible to adjust debts to bond holders that option now becomes certain.

Adjusting these debts and crafting a new plan for the future is the first step on the road to recovery. While many of Detroit's powerful political leaders certainly thought they could fight off the inevitable just long enough to prompt federal bailouts, municipal bankruptcy is an alternative that, though painful, is more than just another way of temporarily patching a hole in a sinking ship.

Municipal bankruptcy, like any other form, is not without its pitfalls. The decision to file and ultimate outcome could have a tremendous impact on the ability and costs of other municipalities seeking to borrow money. Further, if political tensions prevent Detroit from properly addressing financial issues that lead to this filing, the City could end up back at square one.

The possible benefits of Detroit's bankruptcy are significant. New, promising sprouts of development in the downtown area will have the opportunity to grow and mature shielded from the crushing weight of political failure, debt and corruption. Developers and families alike can plant roots in a city they are confident will be able to provide vital public services like safety, trash pick up and street lighting. Current, former, and future employees will be able to count on a secure retirement.

Bankruptcy is never an ideal outcome, but Detroit was out of options. The bold step taken in the Motor City could serve as a warning and a signal, that municipal bankruptcy is a real possibility for other municipalities if they fail to address their debts now. This includes cities like Syracuse and Chicago, along with other municipalities in states like Pennsylvania and California. The Windy City is likely the next shoe to fall. Above all, elected officials around the country must take this lesson from Detroit: Do not spend money you do not have because one day, the bills will come due.