May 13, 2013 / 2:45 PM / 7 years ago

RPT-UPDATE 1-Detroit emergency manager: city "clearly insolvent"

By Nick Carey and Steve Neavling
    May 13 (Reuters) - Michigan's biggest city is "clearly
insolvent" and needs many fixes including to its pension system
and labor agreements to address its problems, according to a
report outlining the state of Detroit's finances.
    "The City of Detroit continues to incur expenditures in
excess of revenues despite cost reductions and proceeds from
longterm debt issuances," the city's recently installed
emergency manager, Kevyn Orr said in his first report. "In other
words, Detroit spends more than it takes in - it is clearly
insolvent on a cash flow basis."
    Detroit had only $64 million in cash on hand and current
obligations of $226 million on April 26, 2013-a negative net
cash position of $162 million, the report said. 
    Operating expenditures have exceeded revenues by about $100
million a year since 2008, according to the report. The city had
an accumulated $326.6 million unrestricted deficit. Detroit is
projected to add an additional $60 million to the accumulated
deficit balance when the current fiscal year closes June 30.  
    The city will make $31 million in pension payments this
year, but will defer another $108 million in pension payments.
Orr stated that a city task force is reviewing the plans and
whether actuarial assumptions are accurate and funding is
    The city also has $5.7 billion in unfunded retiree benefit
    All told, Detroit has liabilities totaling $9.4 billion in a
variety of areas:  special revenue bonds, revolving loans,
pension obligations and other financial instruments. "Debt
service payments place a significant strain on the city's
budget," the report states. 
    The city's retiree pool currently outnumbers active
employees by a 2 to 1 margin that is growing, the report said,
so Detroit "must address pension and retiree healthcare
liabilities as part of any comprehensive restructuring."
    On the labor front, Orr signaled he is prepared to take a
hard line with the city's unions. Noting that the state law
authorizes him to "reject, modify or terminate" any of the
city's 48 collective bargaining agreements, Orr states that he
is 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
    The report also notes that a review of police, fire and
other emergency services is 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 police and fire department both are in need of
restructuring, Orr found. 
  Detroit must also evaluate "interest rates, amortization,
outstanding principal amounts, security interests, legacy
liabilities and all other aspects of short and longterm debt"
as part of a "comprehensive restructuring." 
   "Significant and fundamental debt relief must be obtained to
allow the City's revitalization to continue and succeed," the
report says.
   Orr was installed by Michigan's Republican Governor Rick
Snyder in March to try to fix Detroit's finances through
bankruptcy if necessary. The city has been running a deficit of
around $100 million a year.
    In his report, which was required by law, Orr says the city
has obligations of "at least" $15 billion, some $2 billion more
than previously thought and will end this year with a deficit of
$125 million.
    Orr's report says Detroit is projecting a positive cash
balance through December 2013, adding "this is only as a result
of the significant amount of payment deferrals and amounts
borrowed from, and owed to, other funds, which is clearly not
sustainable in the long run." 
    "Structural change must occur to address the City's
operating deficit and cash burn," the report adds.
    Detroit "will need to make significant investments to
upgrade capital assets so that it can provide necessary services
to its citizens and residents." 
    Orr's report also notes that changes to the city's charter
and legislation may be required to reduce bureaucracy and
improve operations.
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