UPDATE 2-Detroit bankruptcy plan is feasible, but concerns remain -report

Mon Jul 21, 2014 2:46pm EDT

(Adds comments from expert witness on Detroit's finances, negotiations)

By Karen Pierog and Lisa Lambert

July 21 (Reuters) - Detroit's plan to adjust $18 billion of debt and exit the biggest municipal bankruptcy in U.S. history is feasible, according to an expert witness report that also expressed concern that the costs of its rapid restructuring may hurt the city's ability to fix its "broken operations."

Martha Kopacz, a senior managing director at Phoenix Management Services in Boston, who was chosen by U.S. Bankruptcy Judge Steven Rhodes in April as an expert witness in the case, concluded in her July 18 report obtained by Reuters on Monday that the plan's revenue, expense and payment assumptions are reasonable.

But the report, which was based on more than 200 interviews and fact-gathering meetings, raised concerns over the speed of the city's bankruptcy case, filed a year ago. Specifically, Kopacz noted that settlements reached with some of Detroit's creditors may shrink available resources for the city's post-bankruptcy efforts.

"This bankruptcy has been largely focused on deleveraging the city, often to the exclusion of fixing the city's broken operations," she wrote.

Kopacz also described problems with financial projections in the plan, noted some city departments do not understand the plan and raised questions about financing the city's exit from bankruptcy. She warned there are many "unknown and unknowable" factors that will influence the city's finances once it emerges from bankruptcy.

"The bilateral mediations between the city and the creditor groups worked well to quickly deliver settlements of key disputes. However, the lack of time available for multiparty negotiation has resulted in settlements that, taken in total, greatly reduce the contingency available in the plan," she added.

Rhodes has set Aug. 14 for the start of a lengthy hearing on whether Detroit's plan is fair and feasible. The judge will also take into account the results of creditor voting on the plan, scheduled for release later on Monday by the city.

CITY PROJECTIONS CONFUSING

"Even after many years of practice with dysfunctional, insolvent, operationally troubled enterprises, I was confused by the city's projections in POA (the plan of adjustment)," Kopacz's report said.

The method of projecting finances is convoluted, the report said, which "contributes to the feelings amongst many creditors in this case that the financial projections in the POA are a 'black box' and that it was the city's intent to obfuscate important information. I choose to believe that it was simply an unfortunate result of two advisory firms sharing responsibilities."

A large part of the bankruptcy negotiations has involved Detroit's $3.5 billion unfunded pension liability. Kopacz warned the problem could resurface.

"I understand the practical nature of the resulting settlements and the city's desire to manage its cash requirements related to pension contributions over the next 10 years. However, this does not fix the liability," she wrote. "The city cannot look away for 10 years and return in FY 2023 to find the liability has again become an unmanageable burden."

In addition to her role in looking at Detroit's assumptions regarding cash-flow projections and revenue forecasts, Kopacz is also required to testify in the city's bankruptcy case. Kopacz has rung up about $421,000 in consulting fees, $68,300 in expenses and nearly $25,000 in legal fees as of the end of May. (Reporting By Karen Pierog and Lisa Lambert; additional reporting by Bernie Woodall in Detroit; Editing by David Gaffen, Meredith Mazzilli and Chizu Nomiyama)

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