(Adds comments from expert witness on Detroit's finances,
By Karen Pierog and Lisa Lambert
July 21 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
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
"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
"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
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
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)