LIVE VIDEO: WZZM 13 News at Noon    Watch
 

Detroit's emergency manager to ask creditors for sacrifices

11:57 PM, Jun 13, 2013   |    comments
Detroit Free Press photo of Kevyn Orr, Detroit's emergency manager
  • Share
  • Print
  • - A A A +

DETROIT (Det. Free Press) -- The Motor City's day of reckoning is here.

The insolvent city's emergency manager, Kevyn Orr, has called together dozens of major city creditors for a historic meeting this morning at the Westin hotel at Metro Airport, officially kicking off negotiations with stakes that could hardly be higher.

Riding on the outcome of these talks - which could extend into August once creditors go back to mull over Orr's offer to settle debts for fewer than 10 cents on the dollar - are Orr's hopes to keep the city out of bankruptcy court and, ultimately, his challenge to vastly reduce the city's staggering debts so he can restructure city government. The goal, his team says: Put Detroit in a position to grow and provide better public services in a sustainable way for years to come.

"We're going to go in, and we're going to fight for the future of the city of Detroit," Orr's spokesman, Bill Nowling, told the Free Press this week. "That's what it's about."

Out of view from the public eye, Orr is expected make an introductory presentation to an audience that speaks his language - dollar signs - and hand out copies of a roughly 200-page proposal that goes into excruciating detail on every Detroit financial obligation, including bond debt and pension and health care obligations estimated at $15.8 billion but that could be as high as $17 billion.

The basic math tells the story.

At $17 billion, Detroit's liabilities represent nearly $25,000 for each of the city's 700,000 residents. It is money Detroit cannot afford to pay back.

Nowling said that, to Orr's knowledge, what he plans to do today has never been done before in such a large-scale way. All major creditors will be in one room at the same time, hearing the same plan for restructuring the city's debts and revamping the way city government operates so that all understand where he wants to take the city. Unions will learn what cuts banks will be asked to take, and vice versa. The same goes for retiree groups.

All will be asked for great sacrifice.

"We're giving everybody in that room a plan," Nowling said. "It's an open book. That hasn't been done before. The purpose for doing that is that we need to come up with a city that's strong and viable moving through this process, whether in or out of court, and we want to put everyone on notice that we're going to treat them equally. We're not going to pit union stakeholders against creditors. We're not going to pick sides. The only side we're going to pick is the plan, because the plan is in the best interest of the 707,000 residents. This is what we think it's going to take to do that."

Detroit's debt-to-asset ratio may be as high as a stunning 33-1. Meaning, for every $1 in assets the city has, it holds $33 in debt. By comparison, that ratio was 20-1 for General Motors when it and Chrysler went into bankruptcy in 2009, according to State Budget Solutions, a nonpartisan nonprofit group that advocates for reform in government budgeting and pensions.

While other bankruptcy experts doubt a consensual settlement can be reached out of court, Jim McTevia, founder of the McTevia and Associates turnaround firm in Bingham Farms, said he believes it's possible given the enormous costs associated with a prolonged bankruptcy battle.

"Sitting down with creditors and sharing with them facts that are irrefutable, reasonable people will come to the same conclusions," McTevia said. "There's no conceivable way in the foreseeable future that the City of Detroit can pay its debt. There's no series of discussions, no court hearings, that can change those facts. It's simply a matter of everybody accepting where the city really is.

"Based on info I have, the City of Detroit can just barely pay for the costs of its current goods and services," McTevia added. "If there are facts that support that, then how can $15-billion worth of creditors in their fondest dreams expect to be paid what they are owed? They just can't."

It's possible that the best Orr can hope for is to file a Chapter 9 petition with a majority - perhaps 80% to 90% - of creditors agreeing to terms before the case ends up in court. Bankruptcy experts say that could help persuade a federal judge to force recalcitrant creditors to agree to a deal that most others involved will accept, potentially speeding up a court case that otherwise might stretch on for years amid fights between competing interests.

Today is just the start

Craig Barbarosh, a California lawyer who worked on municipal bankruptcies in that state's Orange County and Stockton, said Thursday that he expects weeks of additional discussions between Orr and creditors after today's meeting.

"Today is the first mile of a marathon," Barbarosh said. "Part of it is to try to create expectations, to try to manage expectations. The best thing the manager can do is walk the creditors through what the projections are and realistic sources of recovery. Whatever he proposes is not what the final deal will be."

Barbarosh said Orr knows that he may not win an out-of-court deal and may, in fact, be setting the stage to "use the Chapter 9 proceeding in a very prearranged way, where you have a negotiated solution in advance and you use the bankruptcy filing to bind non-consenting minority creditors."

But equal to the concessions Orr will ask for is his template for a reorganized city government, and his office has shared few details about those plans ahead of today's meeting. Some of what's expected to be outlined in the report is already known. Orr said this week that he intends, for one, to pursue leasing Belle Isle to the state to run it as a state park and, as the Free Press reported Thursday, he's working on proposals to privatize trash collection. Combined, those efforts would save the city $21 million a year.

Top officers of several of the city's unions are bracing for the unexpected. Some of the unions also are willing to fight if Orr asks for too many concessions.

"We are ready to go," said Al Grant, secretary-treasurer of the Retired Detroit Police and Fire Fighters Association.

Grant, whose association represents 6,500 retirees, said lawyers and financial advisers have been hired to negotiate on the city's behalf. He declined to disclose those advisers but said the city's two pension funds have set aside $5 million to fund the potential legal battle.

"We've got things in order," Grant said.

Grant, who will be in attendance today, said his phone has been ringing off the hook from members who want to know what the future will hold.

"There is a possibility of taking a substantial cut, and it is unsettling for retirees," Grant said.

DeShawn Benson, unit chairman of UAW Local 2200, represents 27 sewage plant operators who are working under a one-year contract that expires in July.

The union is in negotiations now with the Detroit Water and Sewerage Department but knows that at any moment, Orr could step in and take over the contract talks.

"We don't have any idea how it is going to work," said Benson, who will not be attending today's meeting. "We are all in more or less a discovery mode right now." The UAW will be sending its own staff to the meeting on behalf of some of the UAW locals.

Detroit's bondholders and the insurance companies that back some of those holdings are expected to share in the sacrifice. The financial firms and insurers contacted Thursday were vague when asked about their expectations of Orr's presentation.

A spokeswoman for Assured Guaranty, a bond insurer, said she does not expect the city's financial crisis to hinder debt payments on $1.8 billion in bonds backed by sewer and water revenues. Assured also has $320 million in general obligation exposures.

"Assured Guaranty is committed to honoring its unconditional and irrevocable guaranty to holders of its insured obligations," spokeswoman Ashweeta Durani said Thursday in a statement.

By Matt Helms, Joe Guillen and Brent Snavely, Detroit Free Press staff writers

Most Watched Videos