Detroit’s 15-month deadline to reorganize $18 billion in debt in a record federal bankruptcy is an “aggressive” goal needed to restore essential city services after 60 years of decline, Michigan Governor Rick Snyder said.
“This probably is the largest challenge in the United States,” Snyder, a 54-year-old Republican, said today. Bankruptcy court gives the city “one forum to resolve all the issues.”
The emergency manager Snyder appointed, Kevyn Orr, can be removed from his post by the city council in September 2014, returning local control to elected officials. Orr and Snyder, in separate interviews at Bloomberg headquarters in New York, argued that the July 18 bankruptcy filing is the best way to adjust the city’s debts by that deadline.
“I don’t have time to run in place or to play games as usual or to engage in the usual banter that’s happened all too often in Detroit,” Orr, 55, said yesterday. He endorsed a plan by the bankruptcy judge to name a mediator to help the city negotiate with its unions, pension funds and bondholders.
Detroit filed the biggest U.S. municipal bankruptcy after decades of decline left the city unable to pay its debts and provide needed services. Orr said creditors refused to give an “honest response” to his June debt-reduction proposal and instead sued him and Snyder to block the bankruptcy filing.
“I’m hoping the mediator provides a process by which we can stop talking past each other,” said Orr, who worked on the Chrysler LLC bankruptcy while an attorney at Jones Day.
The proposal by U.S. Bankruptcy Judge Steven Rhodes to name U.S. District Judge Gerald Rosen as mediator is on the agenda for a hearing on Aug. 2 in Detroit.
Orr, who was appointed in March, agreed that the September 2014 deadline to reach a solution in bankruptcy court is ambitious. He also said that should mediation fail, Detroit has already met most of the conditions required to ask Rhodes to impose cuts on creditors, a procedure available to the court under the U.S. Bankruptcy Code.
Snyder said private industry is doing its part to help Detroit recover, citing new businesses such as Dan Gilbert’s Quicken Loans Inc. that have opened or expanded offices in the city. The last piece of the recovery will be fixing the city’s government and public finances, he said.
That could include creating some kind of outside financial oversight body once the emergency manager leaves office, Snyder said, an idea Orr also mentioned.
Before the bankruptcy, Orr proposed eliminating about $2 billion in unsecured bond debt and reducing $3.5 billion in future pension liabilities. Under that proposal, those debts, and money owed for other retiree benefits, such as health care, would be replaced with about $2 billion in new debt.
No U.S. city or county in bankruptcy has successfully invoked the Bankruptcy Code’s so-called cram-down procedure to force creditors to take losses on their principal.
“Records are made to be broken,” Orr said.
Last month, in the $4 billion bankruptcy of Jefferson County, Alabama, creditors voluntarily agreed to take about $1 billion less than they are owed. That proposal will go before a judge in November, and the county may exit bankruptcy by the end of the year.
Two federal judges have said consensus will be the key to ending the California municipal bankruptcies they are overseeing. Stockton is in mediation with its creditors, and the judge in the case of San Bernardino has proposed a mediator.
Orr meanwhile is looking for other ways to shore up Detroit’s finances.
The city will “definitely” exercise an option to buy its way out of interest-rate swap contracts by paying 75 percent of their current market value, he said. The termination payment to end the contracts could run into the hundreds of millions of dollars, according to court papers. On June 28, the market value of the swap contracts was $296.5 million, the city said.
“That’s $80 million in savings,” Orr said.
Orr said he’s still talking to some creditor groups, including those representing bond insurers that may have to pay investors if Detroit can’t meet all its obligations.
Carol Connor Cohen, a lawyer for bond insurer Ambac Assurance Corp., declined to comment on the timeline or the mediator proposal. Robert Gordon, an attorney for a pension fund for Detroit city workers, didn’t immediately return a call seeking comment.
The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).