Detroit’s wildly accelerating bankruptcy process

March 25, 2014

The technocratic governor of Michigan, Rick Snyder, and the emergency manager he appointed to restructure Detroit, Kevyn Orr, spoke at an event sponsored by the Manhattan Institute for Policy Research this week. Their relentless positivity contrasted with the creditor mess they had left behind in Detroit.

Orr insisted, as he has in other media appearances, that Detroit creditors must rapidly concede to proposed settlement terms so that the largest bankruptcy case in American history can be concluded. Bloomberg reported:

Detroit Emergency Manager Kevyn Orr said time is running out for creditors to reach an agreement with the city on a plan to resolve the biggest U.S. municipal bankruptcy by reducing $18 billion in debt.

Creditors know all about the city’s finances and don’t need any more information, Orr said today at a conference in New York sponsored by the Manhattan Institute for Policy Research. Orr said that in the next couple weeks, he hopes to have enough agreement among creditors to get a debt-adjustment plan enacted by fall. Detroit entered bankruptcy July 18.

Meanwhile, back in Detroit, retiree and labor representatives say that Orr has presented limited and confusing information. Detroit News reports:

Clear, accurate information has been elusive in the bankruptcy case, particularly for retirees, according to Bruce Babiarz, spokesman for the city’s police and fire pension fund. He faulted the city for burying information about benefit cuts so deep in a 400-plus page document that retirees needed ‘a very large magnifying glass.’

The bankruptcy case’s fast-track timeline could make it difficult to clearly explain the cuts to retirees, said Steven Kreisberg, director of collective bargaining for the city’s largest union, the American Federation of State, County and Municipal Employees.

Incredibly, retirees will be mailed a CD-ROM to explain their proposed benefit cuts:

Each retiree will be mailed a CD-ROM containing the city’s debt-cutting plan, a ballot and a return envelope.

Lawyer Carole Neville represents a committee defending more than 30,000 retirees and their beneficiaries and is fighting pension cuts in bankruptcy court. She wants retirees to receive in the mail documentation tailored to retirees.

‘They need a simplified version of the plan and the treatment of retirees,’ she told the judge during a March 5 hearing. ‘I can’t imagine sending out CDs to a population that has thousands of people over 85 (years old).’

‘I agree,’ [federal bankruptcy judge Steven] Rhodes told her. ‘I am very concerned about that. There are two things they want to know: how much they will be paid and when.’

Another unfinished part of Orr’s bankruptcy plan is a new structure he wants to create for the city-owned Detroit Water & Sewerage system. This new authority would levy approximately $47 million a year from the surrounding counties that use the Detroit Water system. This money would go Detroit’s general fund for services for city residents. But officials from the surrounding counties, who would mostly pay the $47 million, are not buying Orr’s proposal. From the Macomb Daily Tribune last month:

As officials sort through Detroit’s voluminous plan to get out of bankruptcy, the suburbs appear no closer to agreement on one key piece of Emergency Manager Kevyn Orr’s blueprint – a 40-year deal to lease the Detroit water system to Wayne, Oakland and Macomb counties for $47 million a year.

A Feb. 11 memo shared among suburban officials outlines in blunt language the many areas where suburban officials do not trust EM Orr’s negotiating team. Portions of the detailed, 11-page memo indicate that Oakland and Macomb leaders fear that they are being scammed.

Chad Livengood of the Detroit News summarized the Detroit water system’s legacy financial problems:

Creation of a regional Great Lakes Water Authority remains Orr’s preferred option. But the talks with representatives of Oakland and Macomb counties, particularly, are encountering multiple obstacles: some $1.5 billion in operating losses over the past seven years; more than $500 million in abandoned projects, and more than $500 million to terminate bad debt; $142.5 million in unpaid water bills; and fears that an authority’s dismal credit rating would make it difficult to issue bonds.

These legacy issues make it impossible to equitably charge the surrounding counties for these enormous shortfalls. It’s also hard to see how the system could be privatized and still be able to direct $47 million a year into Detroit’s coffers. Orr has no authority to compel the surrounding counties into an agreement. Now he threatens to restructure $4 billion of the bonds issued by the water and sewer system but it is unclear how this could be done in the middle of a federal bankruptcy proceeding.

Orr wasted no time dissing Detroit’s bondholders in his Manhattan Institute talk. The Detroit News reports:

Orr said he’s not overly concerned with how the municipal bond market will react to Detroit’s bankruptcy. He said his experience has been that ‘the only thing people react to after restructuring is the color green,’ and that he’s focused on making Detroit an attractive place for reinvestment. ‘The status of the city and its precarious financial situation was known for a long time,’ he said.

“Full faith and credit” general obligation bonds appear to be easily abrogated as far as Orr is concerned.  He seems to be saying that by waving a little extra yield in front of municipal market mercenaries, they will come herding back to Detroit paper.

Judge Rhodes has issued an “Order to Show Cause Why Expert Witnesses Should Not Be Appointed” to independently validate the plan created by Orr. This is an excellent move by judge Rhodes given how many unresolved parts there are in the post-bankruptcy financial plan. The primary unresolved part of the plan is the $47 million per year that Orr wants to extract from the water and sewer system. Realistically, that money is not there.

I’ve written previously that the rushed timetable for completing Detroit’s bankruptcy will make it a shambles. Orr amps up the demands he makes to those involved in the bankruptcy. It’s a pity that critical decisions are being forced on retirees and other parties without inadequate information. It’s the rushed deadline set by Orr and Governor Snyder that is wildly accelerating this process.


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Detroit’s bankruptcy will cost the taxpayers of
the United States 30 billion when Detroit’s debt is
nationally socialized like the debt of GM, CHYRSLER,
Iceland, Stockton, the banks etc.
Kevyn Orr was hired to transfer as much of Detroit’s
debt from the state of Michigan to the Federal taxpayers.
Detroit is a player in the ‘Golden Age of Debt”

Posted by billieshears | Report as abusive

Debt claims against governments are difficult to enforce, because the debtor is the people, who are presumed by the judiciary to have a greater need for municipal resources than the creditor. The words in the debt contract dont matter. In the end, a claim against a municipal government or state will prove to have no greater lien than a claim against Argentina.

Posted by nixonfan | Report as abusive