By Nick Carey and
Steve Neavling
Mon May 13, 2013 7:59pm EDT
(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 long‐term 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.
(Reporting by Nick Carey and Steve Neavling.; Additional
reporting by Bernie Woodall and Deepa Seetharaman.; Editing by David Greising,
Sofina Mirza-Reid, Leslie Gevirtz, Toni Reinhold)
Comments:
If the Detroit pension plan is terminated, balances will
accrue to participants. They will be able to transfer these balances to IRAs or
take a lump sum taxable check. Those who are already retired will continue to
receive their benefits. Other Benefits like “extra” retirement
medical may be terminated and would end.
Norb Leahy, Dunwoody GA Tea Party Leader
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