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Detroit CFO Says Debt Plan Needed to Fund New Spending

Sept. 5 (Bloomberg) -- Detroit’s plan to eliminate more than $7 billion in debt is needed to free up funding for $1.7 billion in new revitalization investments, the bankrupt city’s chief financial officer told a federal judge.

John Hill, a former top executive at the U.S. Government Accountability Office who helped the city of Washington build a $2 billion surplus after years of fiscal decline, testified yesterday in a trial over Detroit’s debt-adjustment plan.

Without the proposed plan, the money the city needs “would not be available,” Hill told U.S. Bankruptcy Judge Steven Rhodes, who is to decide on the fairness and feasibility of the plan after the trial.

Only $200 million of the $1.7 billion the city will invest over the next 10 years will be borrowed, Hill said. Some amount will come from restructuring city operations, he said.

Hill was the first of about 25 witnesses the city plans to call over the next few weeks as it tries to persuade Rhodes to approve the debt plan. Bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co. claim the plan violates the Bankruptcy Code because bondholders face deeper cuts than do pensions for retired city workers.

Raise Taxes

Syncora attorney Douglas Smith asked Hill yesterday whether Detroit has done enough to try to raise taxes. Syncora has argued that the city should try to raise taxes even though the rates can’t be increased without a change in Michigan law.

“The city has all these advisers. The city is spending $100 million on them,” Smith said. “Has the city ever asked them to do a study” on raising taxes?

Hill said he wasn’t aware of any new study, in part because Detroit “already is at the maximum rates. It’s generally thought the tax rates are pretty high.”

While questioning Hill, Smith repeatedly made the point that if the city recovers and runs a surplus, Syncora and the other creditors wouldn’t get any more money.

“Creditors only got what they get in the plan and there’s no potential for an upside?” Smith asked.

“That’s my understanding, correct,” Hill answered.

The bankruptcy case will test an unusual deal in which wealthy donors and Michigan lawmakers pledged to shore up Detroit’s public pension system with more than $800 million. As part of what the parties call a “grand bargain,” the city agreed not to use its art collection to pay creditors.

Record Filing

Detroit filed the biggest ever U.S. municipal bankruptcy last year, listing $18 billion in debt and saying that decades of decline had left it unable to provide basic services to its almost 700,000 residents while still meeting financial obligations.

The city has proposed paying 10 cents on the dollar to investors who hold $1.4 billion of pension-related debt. Syncora and FGIC would be forced to cover investor losses should the plan be approved.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Steven Church in Detroit federal court at

To contact the editors responsible for this story: Andrew Dunn at Peter Blumberg

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