Detroit's state-appointed emergency manager is asking creditors to accept pennies on their dollars to keep out of bankruptcy a city that has gone from being the world's automobile capitol to an icon of mismanagement, irresponsible largesse for city and union workers, corruption and cronyism.
Emergency Manager Kevyn Orr, who presented to the city's lenders a wide-ranging plan that envisions spending $1.25 billion on blight removal and public safety initiatives, is also directing the city to stop payments on $2 billion in unsecured debt. Detroit has about $17 billion in liabilities.
If Orr's proposal is not accepted by creditors, the city could be declared in default, a step that would raise dramatically the likelihood that Detroit would have to file for Chapter 9 bankruptcy. The last time a large American city filed for bankruptcy was 1978 when Cleveland took that step.
"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," Orr said on Friday. "We cannot repeat the mistakes of the past."
Orr is offering many of the secured creditors 10 cents or less on their dollar. In total, creditors have about $2.3 billion in claims on the city, but Detroit is bleeding cash so quickly that they will soon be unable to continue making payments.
The plan includes transferring authority for the city’s water and sewage department to regional officials, cutting pensioner’s benefits, slashing 99.6 percent of current public health care offerings and ceasing some debt payments. The proposal also says Detroit should rely on the state of Michigan to deal with Detroit’s abandoned properties and blight.
Meeting with investors, Orr described the plan as bold, saying "aggressive action is required to get Detroit back on its feet and improve the quality of life for people who call Detroit home,” according to the Free Press. “Detroit’s road to recovery begins today.”
Many of Orr’s proposals are and will be highly controversial. Late last month, Orr proposed selling off several priceless works of art from the Detroit Institute of Arts in order to satisfying creditors -- a sale that could fetch “several billion dollars,” Deadline Detroit reports. Orr’s proposal was met with severe backlash from the art community in Michigan.
Another earlier proposal put forward by Michigan to help Detroit’s finances involved the state purchasing Belle Isle in the Detroit River and turning it into a state park in order to take the management and upkeep off the city’s hands. It was struck dead by the Detroit City Council.
Despite the opportunity for knee-jerk uproar, especially among the retirement community at the proposal of slashing benefits, pension officials said in a statement on Friday that they will help with Orr’s efforts “in a cooperative manner and with an open dialogue.” “For many, these pensions are all they have. They provided valuable service to the city and many live in the city,” the statement said.
In another spot of bad news, Standard & Poor’s yesterday revised the outlook on several of Detroit’s bonds on Thursday from stable to negative. "The negative outlook reflects additional risks that the system may not be able to generate net revenues that provide more than 1x coverage on all annual debt service and pension obligation costs ,” S&P said in a statement. “The city of Detroit is still in the midst of severe economic stress. At the current rating level, we would expect that net revenues would remain at least 1x the system's fixed costs.”
Maya Shwayder is from Detroit and is currently on Twitter.