Detroit Last-Ditch Talks on Cutting Debt May Take Months

Photographer: Jeff Kowalsky/Bloomberg

Detroit emergency manager Kevyn Orr must grapple with debt service and retirement costs that drain the coffers even as 10,000 employees have taken pay cuts. Close

Detroit emergency manager Kevyn Orr must grapple with debt service and retirement costs... Read More

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Photographer: Jeff Kowalsky/Bloomberg

Detroit emergency manager Kevyn Orr must grapple with debt service and retirement costs that drain the coffers even as 10,000 employees have taken pay cuts.

Whether Detroit careens into the largest U.S. municipal bankruptcy depends on emergency manager Kevyn Orr’s convincing creditors during the next two months that his plan will revive a city plagued by deficits, crime and strained services.

Talks with debt holders, unions and retirees to erase a $386 million budget gap may last into July or August, Orr said, adding that he has held meetings already. He said he’s preparing for possible Chapter 9 bankruptcy if he can’t strike deals to restructure $15.7 billion in long-term obligations.

“If it appears we’re making progress and having productive discussions, it would make sense, provided everybody’s moving in good faith, to continue along that path,” Orr said yesterday by telephone. “Getting all stakeholders to agree on a concept, a plan, a means by which the city could move forward, is crucial.”

Orr, appointed by Republican Governor Rick Snyder in March to turn around Michigan’s largest city, has such powers as imposing contract terms on unions and restructuring departments. He must grapple with paying debt and retirement costs that drain the coffers even as 10,000 employees have taken pay cuts.

To let the city avoid bankruptcy, creditors owed more than $9 billion are looking for a long-term plan that does more than balance the budget. Detroit’s population has fallen to about 701,000 from 1.8 million in 1950, a slide so steep it must do what no other major U.S. urban center has done -- shrink itself to a sustainable size while rebuilding its infrastructure, attracting business and reforming its workforce.

Snyder’s Gamble

“The governor has really put his reputation and his future on the line,” said Frank Shafroth, a former director of the National League of Cities in Washington.

Orr plans a hearing next week on his preliminary proposal, which paints a sobering picture of a government that since 2008 has spent an average of $100 million more each year than its revenue and has borrowed to stay afloat. Orr would reduce debt costs by lengthening payback terms, lowering interest rates or obtaining forgiveness on some obligations. Covering what it owes devours at least a third of Detroit’s $1.1 billion general-fund budget.

A hearing on his plan is required by a state law that lays out procedures for emergency managers. Ultimately, the measure allows Orr to ask Snyder for permission to pursue bankruptcy if he determines there “is no reasonable alternative.”

Snyder would then respond in writing to Orr and state Treasurer Andy Dillon, a Democrat appointed by the governor. If Snyder approves, Orr would have exclusive power to act.

Core Resistance

Holders of the city’s general-obligation bonds, backed by tax revenue, may be the toughest creditors to persuade to take less than they are owed to let Detroit avoid bankruptcy, said Richard A. Ciccarone, chief research officer at Oak Brook, Illinois-based McDonnell Investment Management LLC.

The municipal-bond market has long assumed that such securities are protected from losses on principal.

“That’s where the biggest objections will be,” Ciccarone said. Forcing investors to take less than they’re owed on general-obligation debt would “have a major impact on the bond market,” he said.

Rather than bankruptcy, Detroit needs to attract more businesses, jobs and residents, and increase revenue, said James E. Spiotto, a partner with Chapman & Cutler LLP in Chicago.

Orr’s Refusal

The city should refinance debt to pay off bondholders, and negotiate cost reductions from vendors, unions and retirees, Spiotto said. He said Orr also should consider selling or restructuring assets, such as the municipal water department.

“Doctors bury their mistakes,” Spiotto said. “In municipal finance, you refinance them.”

Orr said he won’t take that approach to Detroit’s debt because doing so would burden future residents for decades.

Dennis Archer, a former mayor, said the city could learn from how labor concessions helped its auto industry recover after federally managed bankruptcies for General Motors Corp. (GM) and Chrysler LLC. Archer credited concessions by the United Autoworkers Union for the rebound.

“The light at the end of the tunnel is not a train, but a way forward,” Archer said.

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

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

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