Detroit Rescue Roadmap May Confront Detour From Unions

Detroit emergency manager Kevyn Orr’s road to fiscal recovery for the insolvent city may hit potholes with its largest union, whose leaders haven’t met with him and say he should look elsewhere to cut costs.

Orr should focus on collecting overdue taxes, trimming payments to vendors and ending wasteful spending on consultants, said Ed McNeil, assistant to American Federation of State, County and Municipal Employees Council 25 President Al Garrett. McNeil said Orr hasn’t answered requests for meetings.

“This is really about gutting employee benefits, as opposed to fixing what should be fixed,” McNeil said. Council 25 represents about 2,200 of Detroit’s 10,000 municipal workers.

Employees, retirees and debt holders may take cuts as Orr seeks agreements to avoid filing the largest U.S. municipal bankruptcy. His preliminary plan treads lightly on possible worker concessions -- many of the city’s 48 bargaining units have already had cutbacks imposed on them -- and paints a bullseye on rising pension and health-care costs.

“I think we can avoid bankruptcy if people move forward in good faith,” Orr, a lawyer and restructuring specialist, told reporters yesterday outside the Detroit News headquarters. The newspaper said Orr doesn’t intend to end retiree health care.

Orr offered to meet with Council 25’s McNeil alone and not with his negotiating team, said Bill Nowling, a spokesman. He said sitting down with negotiators would come “at the appropriate time.”

Deep Crisis

Orr’s report, which specifies the depth of Detroit’s fiscal crisis and sketches out ways to resolve it, shows that the city confronts a $386 million cumulative deficit by the end of next month, when it may run out of cash. At the same time, the home of General Motors Co. has at least $15.7 billion in long-term debt and retiree obligations.

While the city will pay $31 million into its pensions this fiscal year, it will defer $108 million of contributions, according to Orr’s plan. Detroit also will pay $200 million for health benefits, mostly for retirees, according to the document. Covering the obligations in full would take $339 million, or about a third of the city’s 2013 general-fund revenue.

Detroit’s two pension plans may be underfunded by more than $1 billion, based on an assessment of asset values in June 2011. One fund covers police and firefighters; the other is for general city workers.

Contract Czar

Orr can “suggest modifications” to ensure the plans are structurally sound, according to the report. The law he’s operating under lets him change or cancel contracts, while the report notes that wages and benefits, including pensions, have already been cut for many city workers.

Current retirees’ pension payments are constitutionally protected, said Donald Taylor, president of the 6,500-member Retired Detroit Police and Firefighters Association. However, health care and future benefits aren’t, Taylor said.

Orr, in a meeting two weeks ago, said he couldn’t unilaterally curb retiree payments, Taylor said. Still, he added, “Nobody’s really sure what’s going to happen.”

One cause of the deficit is the elimination of several thousand employees who were paying into pensions, Council 25’s McNeil said. The percentage of active workers contributing to the general retirement plan fell to 39 percent of participants in 2011 from 51 percent in 2004, while retiree payments rose to 70 percent of payroll from 35 percent, according to Orr.

Downward Drift

The Motor City is caught in a spiral of falling revenue from a shrinking tax base, a declining population and a jobless rate of 18 percent, twice the state level, according to Orr’s report. Providing services to an area larger than Boston, San Francisco and Manhattan combined is increasingly difficult.

In his plan, Orr cites $9.4 billion in city debt, including general-obligation bonds and securities tied to pension borrowing, and calls the amount “not sustainable.” It says that reconfiguring the debt “is crucial,” and lists cuts in principal and interest rates among steps to be evaluated.

“Restructuring the city’s liabilities in a fair and equitable manner across all relevant stakeholders is necessary,” according to the report. Orr said creditors will recognize the situation’s severity, as detailed in the document.

“These are rational, intelligent people who understand what a report like ours means,” Orr said of bondholders, bankers and other creditors. “They’ll come to the table, hopefully, in good faith with an understanding we’ve got to do something other than running in place.”

Bing’s Assessment

Mayor Dave Bing, 69, praised Orr’s report as largely in agreement with his own assessment of the city’s plight. Bing, who hasn’t said whether he will seek re-election in November, plans “a major announcement about his political future” today, according to Robert Warfield, his spokesman. Today is the deadline for candidates to qualify for a ballot spot.

Bankruptcy remains an option, though both Orr and Governor Rick Snyder, a Republican who appointed him, have said they want to avoid it.

Court protection wouldn’t solve Detroit’s long-term need to attract more people and businesses, said Bill Brandt, chief executive of Development Specialists Inc., a Chicago-based corporate restructuring company.

“Chapter 9 is Michigan washing their hands of a problem they have to participate in,” Brandt said by telephone. “That doesn’t solve problems, it doesn’t bring in more money.”

While bankruptcy may help Orr reduce pension costs more easily, it may not add to payroll savings, said Stephen Grow, a partner at Warner Norcross & Judd in Grand Rapids, Michigan.

“A city has core functions it has to do, and you need people, you need to provide a standard of living,” Grow said. “You can only squeeze so much out of employees.”

To contact the reporter on this story: Chris Christoff in Lansing, Michigan cchristoff@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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