(DETROIT FREE PRESS) - It became clear to Detroit emergency manager Kevyn Orr by early May that the city's finances were at risk of imminent collapse if the city couldn't access all of its casino tax revenues, according to transcripts of depositions released Tuesday by the City of Detroit.
And by June, the city's financial condition was so bad that the paychecks of some city employees were bouncing, Orr said in a deposition taken Friday.
"I heard that an employee of the city had gone to cash their paycheck and the paycheck had bounced," Orr said in his deposition. "They came back in later that afternoon and it cashed, but we were - we were that precarious in terms of our cash."
At the time, the city only had about $4 million to $9 million of cash on hand on any given day, Orr said. On June 14, the city presented a report to creditors and defaulted on a $39.7-million pension payment, to allow the city to conserve cash needed to provide services to residents.
The situation has improved since then. In his deposition on Friday, Orr said the city now has between $30 million and $40 million of cash on hand on a daily basis.
"Right now, that number may be a little bit higher because we just went through one of our tax-collection periods in August," Orr said.
The depositions, taken last week as part of an objection by one of the city's creditors, Syncora, reflect the urgency and shaky condition the city was in just weeks before it filed for Chapter 9 bankruptcy protection on July 18.
A total of 21 lawyers representing the city, its creditors, pension funds, retiree associations and financial institutions gathered at the Westin Book Cadillac Hotel to depose Orr while 12 were present to depose Kenneth Buckfire, copresident of Miller Buckfire and Detroit's investment banker.
Syncora and other creditors are challenging an agreement reached July 15 between the city and two banks: UBS and Bank of America Merrill Lynch, which would give the city greater access to casino tax revenue.
"The city needs the casino revenue badly," Orr said his deposition, sparring with lawyers over whether the money was a "life or death" issue for Detroit before, ultimately, agreeing that, without it, residents could have faced danger and death.
"I will say again, every day that we don't have access to casino revenue, we cannot make the reinvestment in this city to provide for the health, safety and welfare of the citizens, and that's a true statement," Orr said.
Pressed for whether Orr's team had a Plan B, or an alternative source of revenue besides the casino taxes, Orr told the lawyers no. He said the city had reduced its full-time workforce by 20% before his arrival, including hundreds of police officers, and had shed more than 300 employees between Jan. 1 and his appointment March 25.
In fact, since 2009, Bing has reduced the city's workforce by 4,000 to its current 9,500, closer to a 30% reduction.
Buckfire said in his deposition that short-term cash flow projections developed by accounting firm Ernst & Young in May alarmed the city's top officials and caused them to seek a new agreement for the casino revenue.
"It was clear that the financial condition of the city was more dire than I had expected," Buckfire said in the deposition.
Without a renegotiation of its casino revenue, Buckfire said in his deposition, "The city's ability to operate would be in severe jeopardy and it became a life-or-death issue for the city."
The city's goal was to gain access to about $180 million in annual casino tax revenue in installments of about $15 million per month. Currently, about $50 million of that revenue is held in a reserve account for the city's insurer.
In 2009, Detroit pledged its annual wagering taxes as collateral to avoid an immediate payment of $300 million to $400 million to UBS and a Merrill Lynch-backed financier, which sold "swaps" to the city, guaranteeing fixed interest rates of 6.3% on the city's $1.4-billion pension debt.
Swaps are a complex financial bet designed to guarantee steady interest rates on pension debt that assumed rates would rise.
Instead, rates plunged to near zero, sticking the city with big payments. But now the city wants to exit the swaps, so that it can reduce its debt and reclaim immediate access to the casino revenue.
"It's important that we have unfettered access to the casino revenue," Orr said.
Orr is proposing a settlement in which the city would pay 75 cents to 82 cents on the dollar to exit a $344-million transaction in which the city got fixed interest rates on its pension debt. But that agreement has been challenged by Syncora, which insured the swaps.
U.S. Bankruptcy Judge Steven Rhodes will hear arguments on Sept. 23 on the deal. At that hearing, creditors and the city will argue about the proposed deal, and Rhodes could decide whether to approve or reject the settlement.
The depositions were taken to allow Syncora and other creditors an opportunity to gather information to make a more informative argument in court.
Tax revenue generated by the city's three casinos - MGM Grand Detroit, Greektown and Motor City Casino - is the city's third largest source of revenue, behind income and property taxes. The city also is trying to use that revenue stream to help secure additional financing that would help Detroit continue to function during the bankruptcy process. Buckfire said that about 30 banks or financial institutions have expressed interest in providing financing to the city during its time in bankruptcy. He said officials are trying to secure $350 million.
Orr said the city has not attempted to borrow money and secure it with a lien on anything other than the casino revenues.
Asked whether the city was considering pledging art from the Detroit Institute of the Arts as collateral, Orr initially did not respond.
Later, Orr said "all options are on the table."
Orr said the city is in the early stages of appraising approximately 3,500 pieces of the 66,000 pieces of art at the DIA.
"Once we go through that process, we will have to decide what, if anything, we need to do, but I have no plans to use art to relieve the liquidity crisis that the city is in now," Orr said.
Without the casino revenue, Orr said, "We have no other source to make reinvestment in the city."
Detroit Free Press