Detroit on Bankruptcy’s Brink Stops Paying Some Debts, Orr Says
By Chris Christoff, Brian Chappatta & Mark Niquette - Jun 14, 2013 11:45 AM ET
Protesters yell after being shut out of a public informational meeting at Wayne State University’s Law School in Detroit, on June 10, 2013. State-appointed emergency manager Kevyn Orr told people attending the meeting that the chances Detroit can avoid bankruptcy are about 50-50.
Detroit (9845MF) will suspend payments on unsecured debt, beginning with a $39.7 million installment due today, Emergency Manager Kevyn Orr said as he outlined a plan to avoid a record municipal bankruptcy.
The city would create a regional water agency and retirees would see pensions reduced to cover liabilities under the deal Orr offered to more than 100 creditors and employee-union representatives today in a hotel at Detroit Metro Airport. The city also would spend $1.25 billion over a decade to improve services and eliminate blight.
Orr was appointed by Republican Governor Rick Snyder to oversee Michigan’s largest city, the former auto-manufacturing giant that is home of General Motors Co. (GM) The governor told him to cut costs, streamline operations and reduce liabilities that Orr said in a release today total $17 billion.
Detroit Emergency Manager Kevyn Orr was appointed by Republican Governor Rick Snyder to oversee Michigan’s largest city. Photographer: Jeff Kowalsky/Bloomberg
“Our plan is bold because aggressive action is required to get Detroit back on its feet,” Orr said in the release.
Under Orr’s offer, creditors must decide whether to accept deep losses or try their chances in court, where federal law may trump Michigan (BEESMI) laws that protect bondholders.
According to Orr’s 66-page proposal, unsecured debt includes:
– $5.7 billion in post-retirement benefits.
– $2 billion for unfunded liability for the general employees pension.
– $1.43 billion in pension obligation certificates.
– $1.4 billion in unfunded police and fire pension liabilities.
– $369.1 million in unlimited tax general-obligation bonds.
– $265 million in unsecured loans.
– $161 million in limited tax general-obligation bonds.
– $33.6 million in notes and loans.
Detroit, where officials struggle to provide public safety and even street lights, joins California cities Stockton and San Bernardino in trying to stick bondholders with a loss. Jefferson County,Alabama, on June 5 reached an agreement to end the current record municipal bankruptcy by offering its largest creditors 60 percent of what they’re owed.
The halted debt payments may also extend beyond the city’s certificates of participation to unsecured unlimited-tax and limited-tax general obligations, according to the report. Such debt is backed by Detroit’s full faith and credit and taxing authority, rather than a defined revenue stream.
“It’s going to have an impact” on the $3.7 trillion municipal-bond market, said Bill Nowling, Orr’s spokesman, said in an interview before the meeting at Detroit Metropolitan Airport, 20 miles fromDetroit (9845MF). “But we’re at a crossroads.”
Nowling wouldn’t confirm whether the city would miss its next general-obligation debt payment, saying the city is “going to go month-to-month.”
Secured general-obligation debt is “subject to negotiation with holders,” Orr’s report said.
The plan will enable negotiations that Orr said may last through August. If progress stalls, Orr has the option of filing for Chapter 9 bankruptcy, a move he has said he wants to avoid.
A 2012 state law gives Orr authority to cut spending and services, and to impose new terms for employee contracts, including wages and benefits. He also can sell assets and would be the city’s representative in bankruptcy.
Orr’s proposed concessions stem from a May 12 preliminary report in which he detailed the dire finances of a shrunken city of 701,000 that’s kept itself afloat only by borrowing and skipping payments to pension funds. Since 2008, the city has spent an average of $100 million more than its revenue each year, according to the report.
The long-term liabilities drain money from a $1.1 billion general fund, the report said.
Detroit’s revenue fell as its population declined and home values dropped. Once among the top 10 U.S. cities by population, it has lost more than a quarter of its residents since 2000, to about 701,000 last year. That’s fewer than half its postwar peak of 1.8 million in 1950.
The city’s income-tax receipts have dropped 40 percent since fiscal 2000, to $233 million in 2011, while the jobless rate has tripled and property values declined.
State aid has fallen 48 percent, to $173 million in 2012 from a peak of $334 million in 2002, the report shows. Unemployment at 18 percent in June 2012 was almost double the state average rate of 9.3 percent at that time.
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