Missed $40M payment largest since Cleveland in 1978; 10 cents on the dollar
Detroit (9845MF) is suspending payments on $2 billion of unsecured debt, marketing parking garages and telling retirees to rely on President Barack Obama's health-care law to avoid a record municipal bankruptcy.
Those are among proposed changes in a 128-page restructuring plan Emergency Manager Kevyn Orr offered Friday at a meeting of creditors in Detroit. The moves, including spending $1.25 billion over 10 years to bolster safety and remove blight, will give an insolvent city a viable future, Orr said.
“We have to strike a balance between the legacy obligations to our creditors and our employees and retirees and the duty as a city to 700,000 residents for lights, police, fire, emergency management, cleaning the streets,” Orr told reporters after the meeting.
With a $39.7 million missed payment yesterday on debt issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978. Unsecured creditors may receive less than 10 cents on the dollar under a deal Orr offered to more than 100 creditors and union officials who met at a Detroit Metropolitan Airport hotel.
The city would create a regional water agency to replace its municipally run department and evaluate options with other assets including its parking operations, according to Orr's 128-page report.
Park, Parking
Detroit intends to market its parking operations through a sale, long-term lease or concession arrangement while closing departments that manage or operate nine garages, two lots and 3,404 parking-meter spaces, the report said. The city also wants to lease the 982-acre Belle Isle Municipal Park to the state to save $6 million a year, Orr said.
Active and retired workers would see their pensions reduced under the plan, and the city wants to replace its retiree health-care plan with one relying on federal insurance exchanges under Obama's patient Protection and Affordable Care Act or Medicare with city supplements, according to the report.
After the meeting, Standard & Poor's lowered the rating on the city's general-obligation debt to CC from CCC- minus with a negative outlook. That's 10 steps below investment grade.
Fitch Ratings cut Detroit's unlimited-tax and limited-tax general obligations, along with its pension obligation certificates, to C, which signals “imminent default.”
Lights Out
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) Thanks to 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 proposal, the $11.5 billion in unsecured claims include $5.7 billion in post-retirement benefits, $1.43 billion in pension-obligation certificates and $530 million in general-obligation bonds.
The halted payments may extend to the unlimited-tax and limited-tax general obligations. 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 before the meeting. “But we're at a crossroads.”
Counting Cash
Nowling wouldn't say whether the city would miss its next general-obligation bond payment, saying it is “going to go month to month.”
About $479 million of that debt is considered secured because it's supported by state aid and is “subject to negotiation with holders,” Orr's report said.
The city has about $5.3 billion of bonds backed by revenue from the water and sewer systems, according to the report.
Future bond sales would come from a newly formed Metropolitan Area Water and Sewer Authority, according to the report. The agency would operate the system and the city would continue to own the assets.
The plan will frame negotiations that Orr said may last through August. If progress stalls, Orr can file for Chapter 9 bankruptcy, a move he has said he wants to avoid.
“We think there may be some room for negotiation, but not a lot,” Orr said today. 'We don't have a lot of extra cash or a lot of elasticity.''
Orr Ascendant
Meeting participants emerged and immediately started making calls and texting on mobile devices that had been confiscated to assure attention was paid. Most declined to comment when asked for their reactions to Orr's offer.
Union leaders want to learn more about the deal during a meeting with Orr on June 20, said Yolanda Langston of Service Employees International Union Local 517M in Detroit.
“The best I can say is, 'We'll see,'” Langston said in after the meeting.
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.
Active and retired city workers will face “significant cuts in accrued, vested pension amounts,” according to the report, which said that the general retirement system and police and fire system are underfunded by about $3.5 billion.
Vacant City
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.
“We have to get our arms around legacy debt in order for the city to return to its previous level of prominence,” said Jack Martin, Mayor Dave Bing's chief financial officer, as he left the meeting. The mayor and City Council lost power when Orr took office.
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.
“We're starting our first step,” Orr said. “This isn't meant to be hostile or it's not meant to be combative. This is meant to be an acknowledgment and a recognition of the realities that we can no longer deal with.”
--Bloomberg News--
