Thread: Detroit emergency manager says city "clearly insolvent".

UPDATE 2-Detroit emergency manager says city "clearly insolvent"

Mon May 13, 2013 2:21pm EDT
By Nick Carey and Steve Neavling
(Reuters) -

Michigan's biggest city is "clearly insolvent" and needs to restructure its debt and renegotiate its labor contracts to address its problems, Detroit's emergency financial manager said on Monday.

Emergency Financial Manager Kevyn Orr in a report issued on
Monday presented a sweeping review of Detroit's problems, from
gaping budget deficits to a crushing debt load to abandoned
homes and broken streetlights.

All contribute to the city's problems and must be addressed
for him to accomplish the chief task of putting Detroit's fiscal
house in order, Orr said in the report which was issued online.

"The City of Detroit continues to incur expenditures in
excess of revenues despite cost reductions and proceeds from
longterm debt issuances," Orr said in his first official report
since stepping in as emergency manager on March 25. "In other
words, Detroit spends more than it takes in - it is clearly
insolvent on a cash flow basis."

Some matters will press on Orr immediately. For example,
investors who hold $377 million in interest-rate swap contracts
obtained the right to demand immediate payment the moment Gov.
Rick Snyder appointed Orr to the job, Orr disclosed.

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.

James Spiotto, an expert in municipal restructuring and
partner at Chapman and Cutler in Chicago, said Orr drew a bleak
picture, but bankruptcy could be avoided with cooperation
between the city and state.

"Obviously, there is an urgency, but it's not time to
panic," Spiotto said. "You need a sustainable, affordable
recovery plan."

Operating expenditures have exceeded revenues by about $100
million a year since 2008, Orr's report found. The city had an
accumulated $326.6 million unrestricted deficit. Detroit is
projected to add an additional $60 million to the accumulated
deficit by the time the current fiscal year ends June 30.

"Continuing along the current path is an ill-advised and
unacceptable course if the city is to be put on the path to a
sustainable future," Orr wrote.

Payments of Detroit's long-term debt are eating up nearly 20
percent of Detroit's budget, and Orr is looking for ways to
renegotiate or possibly 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.

Patrick O'Keefe, chief executive and founder of turnaround
specialists O'Keefe and Associates Consulting LLC, based in the
Detroit suburb of Bloomfield Hills, said the city's financial
weakness gives it negotiating leverage with the holders of the
swap contracts.

"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 represent another drain on
the city's finances. Detroit will make $31 million in pension
payments this year, but will defer another $108 million. Orr
said a city task force is reviewing actuarial assumptions
Detroit uses to estimate its obligations.

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.

All told, Detroit has liabilities totaling $9.4 billion in
debts from 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 said.

New York City, Philadelphia and Cleveland avoided bankruptcy
courts with loans and grants designed to keep the cities afloat
while a long-term recovery plan was in the works.

At investment firm BlackRock in New York, Orr's report was
seen as a summary of information that the market already knew.

"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."

Both the police and fire departments are in need of
restructuring, Orr found.

Orr's report also noted that changes to the city's charter
and legislation may be required to reduce bureaucracy and
improve operations.

http://www.reuters.com/article/2013/...0DU1JL20130513