Detroit Preps for Largest Municipal Bankruptcy in History
June 15, 2013 - 1:09 pm
Detroit’s state-appointed municipal manager Kevyn Orr has declared the city to be in default on $2.5 billion in debts and is asking creditors and bond holders to take about 10 cents on the dollar in order to avoid bankruptcy.
It may be a futile effort. Orr will also ask unions to take a cut in their pensions — something the unions have already said is not negotiable. If Orr can’t swing the pension cut, he will have little choice but to declare bankruptcy.
A team led by a state-appointed emergency manager said Friday that Detroit is defaulting on about $2.5 billion in unsecured debt and is asking creditors to take about 10 cents on the dollar of what the city owes them.
Kevyn Orr spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors in a move to avoid what bankruptcy experts have said would be the largest municipal bankruptcy in U.S. history.
Underfunded pension claims likely would get less than the 10 cents on the dollar.
An assessment of the plan’s progress will come in the next 30 days or so.
Orr also announced that Detroit stopped paying on its unsecured debt Friday to “conserve cash” for police, fire and other services in the city of 700,000 people. The debt not being paid includes $39 million owed to a certificate of participation.
“We will not pay that today,” Orr told reporters after the meeting with creditors at a hotel at Detroit Metropolitan Airport in Romulus.
His team said the proposal is the one shot to permanently fix fiscal problems that have made the city insolvent.
Orr said everyone involved needs to come to grips with Detroit’s dire financial situation that has been worsened by years of procrastination and denial.
“If people are sincere and look at this data, you would think a rational person will step back and say, `This is not normal … but what choice do we have?’” Orr said.
The city’s budget deficit could top $380 million by July 1. Orr believes long-term debt tops $17 billion.
As Detroit Free Press business writer Nathan Bomey points out, defaulting on the debt and negotiating in good faith with creditors is a prerequisite to declaring bankruptcy:
Orr warned that the city’s bondholders and creditors won’t fare well in bankruptcy court, so they should agree to concessions now.
“It doesn’t get better with time, OK?” he told the Free Press editorial board after the meeting. “It actually gets worse. So the sooner you come in, the better treatment you might get.”
Still, early indications suggest the city’s unions will seek to block Orr’s attempt to reduce pensions, which could lead him to catapult the city into bankruptcy court in a bid to secure the legal authority to slash payments.
Pension holders are already agitating for their unions to fight Orr’s proposal.
Shelby Township resident Andy Oddo, 77, who retired in 1986 after a 32-year career as a Detroit employee, said he isn’t ready to accept cuts to his pension of about $800 per month.
“I’m just looking at my own problem here, just trying to hang on,” Oddo said. “I just want to hopefully have enough for me to pay my bills.”
Orr’s decision to target cuts to retiree pensions signaled to legal experts that he is preparing for a legal battle that will almost certainly unfold as part of the Chapter 9 bankruptcy process.
Some experts say they believe a bankruptcy reorganization would take years, while others say it could just take months if Orr can line up enough support ahead of time.
“Simply because it goes into Chapter 9 doesn’t mean it has to be chaos,” University of Michigan bankruptcy expert John Pottow said.
One of the reasons that legal experts believe a Chapter 9 filing is inevitable is that Orr is aiming for significant cuts to pensions, which can’t happen outside bankruptcy unless the unions agree.
Orr said he’s ready to “pull the trigger if we have to,” but he would prefer to reach agreements outside bankruptcy.
Ken Schneider, a bankruptcy attorney and principal shareholder of Detroit-based Schneider Miller, said it’s not politically palatable for union leaders to agree to major concessions without being able to say “the court forced it onto me.”
For Detroit, it was more than the exorbitant public union pensions and health benefits that laid them low. It was extraordinary mismanagement by city officials, as well as the flight of auto manufacturers that sealed their fate. There was much procrastination in Detroit too. As recently as February of this year, Mayor Bing was predicting that the efforts he was making to cut the budget and pay the bills would improve the situation.
That turned out to be wishful thinking. As a sign of how far Detroit has fallen, the city was ranked 9th in 2000 in population. The most recent census shows the city ranked 18th — and falling. With nearly 12% unemployment and the city being unable to pay for police, firemen, or even street lighting, Detroit will continue to lose population as anyone with the means to leave is abandoning the city. Soon, only those too poor or too old to leave will be left.