May 13, 2013 / 6:26 PM / 4 years ago

UPDATE 4-Detroit emergency manager says city "clearly insolvent"

7 Min Read

* City net negative cash
    * Labor contracts under review
    * Talks with debt holders continue


    By Nick Carey and Steve Neavling
    May 13 (Reuters) - Detroit is clearly insolvent and could
face a possible bankruptcy if talks with labor unions and
creditors do not make substantial progress on easing the city's
cash crunch, the city's emergency financial manager said on
Monday.
    In his first official report, Emergency Financial Manager
Kevyn Orr presented a grim view of Detroit's problems. The city
faces a $162 million cash shortfall because of pension deals
that outstrip its ability to pay, and a $60 million operating
deficit, all amidst a cityscape of abandoned homes and
businesses, broken streetlights and fractured services, the
report said.
    Orr said talks would begin promptly with unions and
creditors, and he told the Detroit Free Press editorial board
that he should know by the end of June whether the city's
finances can be repaired without a bankruptcy filing. 
    Speaking to reporters later, Orr was matter of fact about
prospects for keeping Detroit out of bankruptcy. "We can achieve
what we have to achieve without going in. If we can't, then we
have to" file for bankruptcy, Orr said. 
    Detroit had $64 million in cash on hand on April 26, but
only because it has deferred $226 million in payments on
pensions, loans and other obligations. Orr's report projected
the city could get through the end of December without running
out of money. 
    "If we keep going the way that we're going, we're going to
hit some bumpy ground in December," Orr said. 
    In issuing his report to the state Treasurer, Orr declared
Detroit is far from solving the problems that caused Governor
Rick Snyder in mid-March to appoint him as emergency manager. 
    "The City of Detroit continues to incur expenditures in
excess of revenues despite cost reductions and proceeds from
longterm debt issuances," Orr wrote. "In other words, Detroit
spends more than it takes in - it is clearly insolvent on a cash
flow basis." 
    Legal experts indicated the declaration of insolvency is
important because the city cannot make a bankruptcy filing
without an official declaration of insolvency.
    Some matters will immediately press on Orr. For example,
investors who hold $377 million in interest-rate swap contracts
obtained the right to demand immediate payment the moment Snyder
appointed Orr to the job, Orr disclosed.
    James Spiotto, an expert in municipal restructuring and
partner at Chapman and Cutler in Chicago, said Detroit could
avoid bankruptcy if Orr could work with the state and other
parties to address deeply entrenched problems. 
    "Obviously, there is an urgency, but it's not time to
panic," Spiotto said. "You need a sustainable, affordable
recovery plan."
    In the past, New York City, Philadelphia and Cleveland
avoided bankruptcy with loans and grants designed to keep the
cities afloat while a long-term recovery plan was worked out. 
    Orr said it was important to put out facts so all parties
know what they were facing. 
    Operating expenditures have exceeded revenues by about $100
million a year since 2008, Orr's report found, bringing the
accumulated unrestricted deficit to $326.6 million. Payments of
Detroit's long-term debt are eating up nearly 20 percent of
Detroit's budget. 
    Orr is looking to renegotiate or restructure Detroit's $8.65
billion in long-term debt. He may reschedule payments, reduce
the principal, renegotiate interest rates or issue new debt
guaranteeing bondholders payment on Detroit's existing
obligations, the report stated. 
    Patrick O'Keefe, chief executive of turnaround specialists
O'Keefe and Associates Consulting, based in suburban Bloomfield
Hills, said Orr likely intends to use Detroit's fiscal distress
as a weapon in negotiating with unions and debt holders.  
    "My guess is they (Detroit) don't have the money so they are
not that worried," O'Keefe said. "It's a little bit like
fighting the ugly kid in the school yard in that he can't get
any uglier."
    Pension payments to city workers are one of the largest
drains on the city's finances. Detroit will make $31 million in
pension payments this year, but will defer another $108 million.
The city also has $5.7 billion in unfunded retiree benefit
obligations, more than previous estimates, the report found. 
    To catch up on pension and health benefits to retirees, the
city would need to spend $339 million, about a third of its
fiscal 2013 revenues, Orr estimated. Orr said a city task force
was reviewing actuarial assumptions Detroit uses to estimate its
obligations.
    Detroit has liabilities totaling $9.4 billion from special
revenue bonds, revolving loans, pension obligations and other
financial instruments.
    At investment firm BlackRock in New York, Orr's report was
only a small step toward addressing Detroit's major problems. 
    "The identification of these items are still far from the
resolution of these items, and that is ultimately what has to
take place here", said Peter Hayes, head of BlackRock's
municipal bonds group, which has $114 billion in assets under
management.
    Labor is among the city's largest challenges. Noting that
state law authorized him to "reject, modify or terminate" any of
the city's 48 collective bargaining agreements, Orr said he was
considering all options.
    "This power will be exercised, if necessary or desirable,
with the knowledge and understanding that many City employees
already have absorbed wage and benefit reductions," the report
said. 
    The report also noted that a review of police, fire and
other emergency services was ongoing and that Detroit's
"infrastructure and public safety fleet are aged and decrepit,
which, in turn, increases the City's operating and repair costs
and decreases its productivity." 
    The Detroit NAACP on Monday filed a federal lawsuit against
Snyder and other state officials calling for reversal of the
state law that allows emergency managers like Orr.
    Emergency managers in Benton Harbor, Pontiac and other
Michigan cities have attracted controversy with their turnaround
plans, and Rev. Wendell Anthony, head of the Detroit NAACP, said
the law was applied unevenly by focusing primarily on cities and
school districts with black residents.

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