Detroit halts debt payments, plans pension cuts – City is financially insolvent, ‘on the brink of financial and operational ruin’Posted by Jim at Monday, June 17, 2013
By Chris Isidore
14 June 2013
(CNNMoney) – Detroit will immediately stop payments on about $2 billion in debt, the city's emergency manager announced Friday, an effort to conserve cash.
The manager, Kevyn Orr, also said Detroit will need to cut pay and pension and health benefits for city workers.
Debt holders are likely to get only pennies on the dollar.
"Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin," said Orr.
Orr met with the city's leading creditors behind closed doors Friday morning, presenting his preliminary restructuring plan. He said further meetings are planned with the unions representing city employees.
Orr's statement and the 134-page restructuring plan did not mention the word "bankruptcy." But the risk still looms.
Orr is on record saying he wants to avoid bankruptcy but can not rule it out. It would be the largest city in U.S. history to file for bankruptcy protection.
Attorney Michael Sweet, an expert in municipal bankruptcy, said he thinks bankruptcy will be the ultimate outcome.
"Orr's meeting with creditors ensures that he makes a good-faith effort to negotiate debts," Sweet said. "While bankruptcy still comes with certain stigmas, it would allow Detroit the opportunity to reinvent itself."
Orr's plan calls for reducing $11.5 billion in unsecured debt -- including pensions, healthcare funds and loans not backed by assets -- down to $2 billion. That would be about an 83% reduction in what investors and retirees are owed.
The restructuring plan received support from Michigan Gov. Rick Snyder, who appointed him to the post in March.
"The plan … requires shared sacrifice among all involved but most importantly focuses on a restructuring designed to return Detroit to solid financial footing, ensure the delivery of essential services for residents, and solidify the city's viability well into the future," said Snyder's statement.
Detroit Mayor David Bing, who had welcomed Orr's appointment despite opposition from many other Democrats, did not have any immediate comment on the plan.
There were protestors gathered outside the meeting. "How am I supposed to live without my pension?" said David Sole, 65, who said he retired from the city's water department in January after 22 years.
Detroit's population has fallen 28% just since 2000. The unemployment rate, while down from 23.4% in 2010, is still at 18.6%. [more]
City of Detroit is financially 'insolvent'
By Chris Isidore
13 May 2013
(CNNMoney) – The Detroit city government is weeks away from running out of the cash it needs to operate, according to an initial report from the emergency manager overseeing its finances.
The report from Kevyn Orr, the bankruptcy attorney appointed by the state in March, lays out a bleak financial position for the city.
"The city has effectively exhausted its ability to borrow," he writes in the report, adding that the city "is clearly insolvent." To avoid running out of cash before the end of its fiscal year on June 30, it must "defer payments on its current obligations," including more than $100 million in pension payments that are due.
"No one should underestimate the severity of the financial crisis," Orr said in a statement. "The path Detroit has followed for more than 40 years is unsustainable and only a complete restructuring of the city's finances and operations will allow Detroit to regain its footing."
He said this report was a baseline from which to develop that restructuring plan. It does not use the term "bankruptcy," but Orr hasn't ruled that out.
Detroit is struggling under at least $15 billion in debt, due to years of borrowing to pay its bills as tax revenues plummeted. The population of the city has fallen by nearly 30% since 2012, and there are currently over 100,000 vacant lots and buildings. Together, this has meant a drastic drop in revenue from both income and property taxes.
Detroit is struggling to come up with annual debt payments of about $246 million, which eat up almost 20% of the its general fund budget. Orr says the city needs relief from the money it owes, suggesting that investors holding its debt could end up taking haircuts.
But investors won't be the only ones hit by Orr's efforts to restructure the city's finances. He is considering changes in healthcare coverage for government employees and retirees, as well as in its pension plans. He's also looking at further changes in pay rates and staffing, on top of the layoffs and 10% pay cut that have already been implemented.