This is about to get ugly in Detroit.
May 12, 2013 at 9:53 pm
Detroit insolvent, EM Kevyn Orr says
City's cash flow running in the red, ability to borrow exhausted
Detroit Emergency Manager Kevyn Orr (Detroit News file photo)
Emergency Manager Kevyn Orr says the city of Detroit's cash-flow crisis makes it "insolvent" and unable to borrow more money to mask over debts being made worse by skipping millions in payments for retiree pensions and health care.
After 45 days on the job, Orr's initial assessment of Detroit's perilous finances is laid bare in a 41-page report to be delivered today to state Treasurer Andy Dillon.
Calling it "a sobering wake-up call about the dire financial straits the city of Detroit faces," Orr said he will use the report as a baseline for paring down the city's $15.6 billion in debt and long-term liabilities.
Orr, a Washington, D.C., bankruptcy attorney, did not use the word "bankruptcy" anywhere in his report but said the city is "insolvent" and has "effectively exhausted its ability to borrow" after years of issuing long-term debt to pay its bills. Previously, he has said he hopes to avoid a Chapter 9 filing.
The report hints that city employees who were not hit by last year's wage reductions could face pay cuts in the near future and that Wall Street bondholders will be asked to take a haircut to relieve a city that shelled out $133 million in debt payments last year on a $1.23 billion budget.
Orr also says he will evaluate "options to reduce or eliminate certain health care costs for both active and retired employees" in light of a $5.7 billion unfunded health care benefit for 18,500 retired city workers and 10,000 active employees.
"No one should underestimate the severity of the financial crisis," he said Sunday in a statement.
Under the new emergency manager law, Orr had to give Dillon a report on his initial findings — much of which mirrors what a state panel determined in finding a financial emergency in Michigan's largest city. and appointing Orr to take over City Hall.
Mayor Dave Bing, who along with Gov. Rick Snyder got an advance copy of the report, said in a statement Sunday that his office hadn't yet done a "comprehensive review" of the report, but Orr's initial findings were consistent with his administration's assessment of the city's finances.
"The plan recognizes the breadth and depth of the financial crisis and offers key, initial guideposts for how best to continue moving forward and ensuring residents are receiving the critical services they need and expect," Snyder spokeswoman Sara x Wurfel said in a statement. "The governor and state are there in continued partnership."
Despite budget cuts adopted by the City Council and Bing before his appointment, Orr said the city's $326 million deficit is expected to grow by $60 million before the fiscal year ends June 30. When another $70 million in borrowing is accounted for, the city's deficit is at least $456 million, Orr spokesman Bill Nowling said.
"In other words, Detroit spends more than it takes in — it is clearly insolvent on a cash flow basis," Orr wrote in the report.
The emergency manager's spokesman put the city's predicament in more blunt terms. "We're going to be out of money by the end of the year," he Nowling said Sunday. "If all we did was collect taxes and pay our debt, we couldn't pay it off in 20 years. That's the situation that we're in now."
As part of the deficit, Orr counts $226 million in accounting gimmicks and delayed payments owed to vendors and the city's pension funds. Detroit is paying just $31 million of a required $139 million payment toward its pensions this fiscal year, Orr said.
For the first time, Orr raised questions in the report about how well funded Detroit's two city employee pensions systems really are.
The Detroit General Retirement System and Police & Fire Retirement System claim to have been 83 and 100 percent funded, respectively, as of June 2011. But Orr and a team of consultants aiding the restructuring of city government are beginning to question mathematical assumptions used to determine the value of the funds.
The city's June 2011 report showed the pensions having a $646 million accrued unfunded liability. But Orr said the market value of the two pension funds' assets — such as real estate — were more than $1 billion less than the actuarial assumptions.
Orr has asked for 56,000 pages in documents from both pension boards as he tries to figure out their true worth, Nowling said.
"Utilizing more current data and or conservative assumptions could cause that deficiency to rise into the billions of dollars," Orr wrote.
If the pensions are worth less than previously thought, Detroit would have to add millions more into the funds above the $108 million in pension payments the city is already behind on, said Eric Scorsone, a Michigan State University economist and emergency manager law expert.
"The pension was kind of seen as one bright spot and if it's not, I think, as they would say, it's another nail in the coffin," he said.
"That was one of those bright spots that well, at least the pension was funded," Scorsone said. "Obviously they can't pay the $100 million, let alone $200 million."
Retirees outnumber active employees paying into the plans and the police and fire plan is closed to new employees under the most recent contract, said George Orzech, a fire department battalion chief.
"That's going to be even more of a drain," said Orzech, a police and fire pension board member.
Orr's report warns that past borrowing to make pension payments, and Wall Street bets against those bonds, could haunt the city's bottom line for years.
Debt service on $1.8 billion in Pension Obligation Certificates and related swaps the city owes is expected to escalate over the next decade, with the principal alone more than doubling from $23.1 million this year to $56 million in 2023, according to Orr's report.
Interest on the pension-related debt will be $83.8 million of the city's $139.9 million in debt interest this year.
"You've got serious money problems coming down the road here because of the POC payments you took out," Orzech said.
Orr, a Washington, D.C., bankruptcy attorney, did not use the word "bankruptcy" anywhere in throughout the report and has previously said he hopes avoid making Detroit the largest Chapter 9 filing in U.S. history.
Orr's initial findings of trouble in the pension fund and the hugely unfunded retiree health care "could be the tipping point where the city ends up having to file bankruptcy if there's no concessions made," said Douglas Bernstein, managing partner of the bankruptcy and creditors' rights practice of Plunkett Cooney in Bloomfield Hills.
Orr could argue in federal bankruptcy court that public employee pensioners in Michigan are constitutionally guaranteed to get paid before other debtors.
"If he takes that position, the problem with taking it is he can't afford to pay it," Bernstein said. "It's simply an obligation that's unsustainable."
Retiree health care benefits aren't constitutionally protected and could be halted wiped out by the emergency manager, he Bernstein said.
Ed McNeil, a representative for the city's largest union, AFSCME Council 25, said the rising legacy costs are nothing new and as the city continues to privatize and reduce its workforce, it is losing funds that could have been paid back into the system.
"If you stop hiring people to pay into the system, then your money is gone," said McNeil, whose union represents about 2,000 city workers. "This is a 'set up to fail' situation."
"It's nonsense. All of this stuff is common sense. People act like it's rocket science. It makes me so mad that the employees are the scapegoat for something that the city created."
Orr was home Sunday in Chevy Chase, Md., with his family and not available for an interview, Nowling said.
He will use the report over the next 60 to 90 days to begin negotiating with creditors and labor unions as part of a restructuring package, Nowling said.
(517) 371-3660
Twitter.com/ChadLivengood
Detroit News Staff Writer Christine Ferretti contributed.
From The Detroit News: http://www.detroitnews.com/article/20130512/METRO01/305130320#ixzz2TARsp7qn
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