Financial Manager Issues Significant Report On Detroit

DETROIT — The city of Detroit will finish its current budget year with a $162 million cash-flow shortfall and doubts about the financial health of its pension funds, according to a new report by the city’s emergency manager that lays out the financial free fall in stark detail.

The report, mandated by the state after an emergency manager’s first 45 days in office, confirms a city in desperate shape, with costs for retiree benefits eating up a third of its budget and public services suffering as Detroit’s revenues and population shrink each year. That has led to deferment of payments and an accumulated deficit that would exceed $600 million were it not for borrowing practices the city has used to cover shortfalls.

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A city that has taken out loans and moved money between funding sources “has effectively exhausted its ability to borrow,” said Kevyn Orr’s report to the state Department of Treasury, to be made public Monday.

Mayor Dave Bing said Sunday that he and his staff were still examining the report.

“However, my initial review is that the assessment by Mr. Orr of the city’s financial condition is consistent with my administration’s findings,” Bing said in a statement. “A complete and comprehensive evaluation of the manager’s report will be conducted over the next 24 hours, and any further comment will be reserved until that review is completed.”

In March, Detroit became the largest city in U.S. history to be taken over by its home state with the appointment of Orr, 54, a high-powered Washington lawyer who worked on Chrysler’s 2009 bankruptcy restructuring. It is the sixth city in Michigan that will be operating with a state-appointed local government official who will have almost unilateral authority to set the budget, hire and fire employees, create ordinances and sell property. The others are Allen Park, Benton Harbor, Ecorse, Flint and Pontiac.

Orr’s report, his first to the state since his appointment March 25, amounts to a status update on his efforts to get a handle on the depths of Detroit’s fiscal crisis. Beyond crystallizing the fiscal mess, it provided little new data or details on how Orr, a Washington, D.C., bankruptcy lawyer, plans to help stabilize a city on the brink of a municipal bankruptcy.

His spokesman, Bill Nowling, said Sunday that the report wasn’t intended to offer a complete blueprint for Orr’s plans for fixing the crisis. Nowling said more details about those plans and how they’ll be put in place will emerge over the next 60-90 days.

“This is a pretty comprehensive diagnosis, but it’s not a cure or management plan,” Nowling said. “That’s going to come later. We really had to get this in place so we’re not putting the cart before the horse. It gives us a platform to really start the restructuring process, now that we know what the city’s financial picture is.”

Still, it does give clues to where Detroit’s restructuring is headed, much of which Orr acknowledges will be based on terms of the consent agreement that the city and state created more than a year ago to try to avoid appointment of an emergency manager. That deal failed amid disagreements among city officials and opposition from some residents and critics who questioned the state’s analysis of the scope of Detroit’s debts and the constitutionality of the emergency manager law.

“There’s a certain undercurrent in Detroit that either, ‘We don’t believe the numbers’ or ‘We don’t believe it’s as bad as they say, and it will get better with time,'” Nowling said. “Unless we change and restructure city operations, it’s not going to get better. That’s a message to the capital markets, for sure, but that’s also a message to stakeholders in Detroit. If we stop providing services, and basically stop functioning as a city and only paid our debts but kept collecting taxes, we couldn’t pay it off in 20 years.”

Among Orr’s major goals:

— Hire a third-party expert to restructure the city’s fire and transportation services for an overhaul similar to one under way in the Detroit Police Department aimed at getting more officers on the street and out of desk duties

— Continue efforts to transition the city’s Lighting Department to an outside provider over the next five to seven years.

— Seek cooperation from the state and Wayne County on better ways to tackle blight and the city’s estimated 78,000 vacant structures, about 38,000 of which are in potentially dangerous shape.

— Review how city departments operate, eliminate redundant functions and consolidate where necessary.

— Bargain further concessions from the city’s labor unions and seek to reduce or eliminate health care plans for 28,500 city employees active or retired. The city’s post-retirement benefits liabilities exceed $5.7 billion, and given discrepancies in accounting and actuarial analyses, it’s unclear how badly underfunded the city’s pension systems are. Detroit’s pension and health care costs are undermined by the city’s lopsided ratio of retirees to active employees; retirees outnumber the city’s current work force by more than 2 to 1.

— Seek reductions in principal amounts the city owes in loans and bonds, as well as longer repayment terms and lower interest rates to sharply reduce an unsustainable debt load of $9.4 billion in bonds, loans and other liabilities.

Those and other reforms will take longer, some perhaps years, and a Chapter 9 municipal bankruptcy is not out of the picture, said Douglas Bernstein, who leads the banking, bankruptcy and creditors rights practice at the Plunkett Cooney law firm in Bloomfield Hills.

Bernstein said the message of Orr’s report is aimed at residents, so they understand the scope of Detroit’s problems and the risk to the city’s ability to provide public services, and city labor unions, who’ll be asked for concessions.

But it’s also clearly meant for creditors who will lose out as Detroit seeks to reduce its debts.

The report “sends a message to them that your prospects of getting fully repaid are slim to none,” Bernstein said Sunday. “And realistically, what I see this as, if and when they have to file for bankruptcy, this fits in very neatly to that. You’re going to see a document that looks very much like this. This is the framework for it if you ever get that far.”

Nowling said the report will act as much-needed leverage as Orr seeks concessions from unions, a restructured city government and a reduction in the amounts Detroit owes to bond and loan holders. Creditors and the insurers of creditors “have towers of lawyers, and they’re going to fight to get every last dime out of the City of Detroit. So we need to know the depth of the problem before we go and sit down with them.”

The report did not mention specific hot-button issues such as whether Belle Isle and the proposal to lease it to the state to be run as a state park is still an option. Nor did it indicate Orr’s intentions for elected city officials, including the City Council. Consultants have recommended cutting the council’s staff and reducing the council to part-time status.

Though Nowling said city workers are likely to be asked for additional concessions, the report wasn’t all bad news for them. It acknowledges the deep pay and benefits cuts they’ve taken and major efforts to reduce the city’s work force by thousands in recent years, largely through attrition and early retirement. The report said, “Most city departments are understaffed.” Orr’s report said he is reviewing a plan to recruit talented employees and retain high-performing workers, and he will reinstate a citywide employee evaluation system and re-evaluate the city’s compensation structure.

The report also makes clear that Orr considers reforming public safety a top priority, including appointment of a new police chief after the retirement in October of former Chief Ralph Godbee Jr. amid a sex scandal. Nowling said Orr wants to hire someone ready to shake up the department and hopes to announce the new chief soon.

Orr has “had good honest discussion with mayor,” Nowling said. “Kevyn has said to the mayor that whoever it is has to be a real change agent and someone who has participated in a department-wide restructurings before.”

From The USA Today

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