DETROIT, Sept 2 Reuters) - Detroit's plan to recover from
bankruptcy includes several blueprints for a new future. The
only problem is the city, the largest ever to file for
bankruptcy, is still a long way from financially healthy and its
restructuring plans leave little room for error.
Detroit is far short of the $1.7 billion it needs over the
next 10 years to remove abandoned buildings, replace outdated
technology and increase public safety to stem the exodus from
the city. The city will be hard pressed to get its daily
operations onto a stronger footing and has few clear ways to
raise all the needed revenue, critics say.
"What Detroit needed to start with was a reinvestment
program," said James Spiotto, managing director of Chapman
Strategic Advisors, a municipal finance consultancy. "If you
don't solve the systemic problem and fix it for real, all you're
going to do is repeat it going forward."
Detroit's 1,034-page plan for fixing the city's finances
will be the subject of a weeks-long bankruptcy court proceeding,
beginning on Tuesday.
Detroit filed the largest-ever municipal bankruptcy in July
2013, with $18 billion of debt. Critics, including a
court-appointed bankruptcy expert, are raising questions about
whether Detroit has reduced its debts aggressively enough, and
even city officials acknowledge Detroit faces significant
challenges, with little room for error.
Federal bankruptcy Judge Steven Rhodes ultimately will rule
on whether the financial restructuring proposed by Kevyn Orr,
Detroit's state-appointed emergency manager, is realistic.
City officials are beginning to see glimmers of hope in the
form of business investment, a downtown housing boomlet, and
major investment from Quicken Loans founder Dan Gilbert, who has
snapped up dozens of downtown buildings.
SHORT OF CASH
The $1.7 billion over the next decade is meant to address
some of the city's most vexing challenges. The biggest chunk,
$558.7 million, would go to public safety, while an upgrade of
the city's decrepit information systems would eat up the
second-largest piece, $479.9 million.
But it is not clear how the city will get the money. So far,
the biggest chunk for Detroit's restructuring initiative is
coming from $300 million in federal grants. JPMorgan Chase & Co
announced a $100 million, five-year commitment in May to
help spur bankrupt Detroit's economic recovery that includes $25
million to address blight.
There is no cash in a bank account to fund the initiatives,
court-appointed expert Martha Kopacz wrote in her report that
gave Detroit's plan a tepid endorsement for feasibility.
The state of Michigan has committed $195 million toward the
$661 million "Grand Bargain" designed to protect the Detroit
Institute of Arts collection, but all of that money is earmarked
to ease city retiree pension cuts, and will not be directed
toward the $1.7 billion of restructuring initiatives.
Even if funds are found, the city in some cases has
downplayed the size of its problems. For example, the $420
million allocated for blight removal is less than half the $850
million called for by the city-backed Blight Removal Task Force.
On one key area of reform, pensions, the city has frozen
accrual of pension benefits and restructured them going forward.
But Kopacz has noted that the assumed rate of return on its
pension investments - 6.75 percent - is below the national
average for public pension funds and could tempt the city toward
volatile and risky investments.
Even when Detroit has arranged funding to meet its needs, it
has not met its original objectives. Exit financing announced
last week, $275 million in new borrowings from Barclays Capital,
came in $25 million lower than city officials had forecast.
Figure in the fact that most of the proceeds will go toward
paying off an existing loan and fund certain creditor
settlements, and Detroit will have little free cash from the
loan to cover operating costs as the city exits bankruptcy.
Confidence in the plan is weak in part because figures put
forward by Orr often do not match Detroit's own budget figures.
"The feasibility reports don't even make a real attempt to
make them convincing," said William Brandt, a Chicago-based
turnaround expert whom Rhodes interviewed for the expert's job.
Brandt called the plan "a treatise in equivocation."
JUDGE COULD REJECT PLAN
John Hill, Detroit's chief financial officer, acknowledged
the city is dealing with significant uncertainties.
Judge Rhodes could reject the plan.
Detroit could lose in its controversial effort to invalidate
over $1.4 billion of certificates of participation (COPs) the
city sold in 2005 and 2006 to pay its pension liability.
The restructuring initiatives are budgeted to bring in $483
million in new revenue and save the city $358 million over the
next decade. To make it happen, though, Detroit will need access
to debt financing to fund the upfront costs of investment, Hill
Mayor Mike Duggan, who will be responsible for Detroit's
fiscal health after emergency manager Orr's term expires later
this month, is moving ahead regardless of the uncertainties.
Inside the Coleman A. Young Civic Center, Hill and other
city officials are scrambling to rebuild Detroit's balance
sheet, restock city departments with new personnel and redesign
Detroit's information infrastructure.
"Moving out on all these things at the same time makes it
difficult," Hill said.
Hill is putting controls in place to help the city stay
within budget: Placing representatives from the CFO's office
into city departments to help control costs, for example. A new
grants management office will scout for federal and foundation
cash. By streamlining hiring procedures, the city aims for a
significant reduction from the six months it currently takes to
hire an employee.
In the area of information infrastructure, Detroit's
historic under-investment is proving an unanticipated benefit.
"There's not a system worth saving," Hill said. "I look at it as
After years of troubling headlines, conditions are beginning
to improve say entrepreneurs like Zak Pashak, who founded
Detroit Bikes, which is hand building bicycles on Detroit's west
"On the ground, bankruptcy is not as dramatic as it might
seem from a distance," said Pashak, who pointed to improvements
in city services and the local business climate. "It's nice to
see the situation addressed. It's not dire. It's actually really
(Reporting by David Greising in Detroit, Karen Pierog in
Chicago and Tim Reid in Los Angeles; Additional reporting by
Megan Davies in New York; Editing by Lisa Shumaker)