Manager sets 14-month ‘Detroit clear’ plan
Print Edition
Detroit’s emergency manager voiced confidence on Wednesday that the city could emerge from bankruptcy before his term expires in October 2014 and possibly without having to borrow more money.
Even so, Kevyn Orr, the bankruptcy expert who was appointed in March to a post that gives him almost unlimited power over Detroit’s finances, warned that the path back to financial health will not be painless for Detroit’s creditors.
If the city wins court approval to proceed with the Chapter 9 bankruptcy filing it made last month, virtually all of the city’s creditors will have payments on their bonds reduced, he said.
“We may need a little bit of cash, or we may be able to stay cash-flow free-and-clear without borrowing anything for the purposes of the bankruptcy,” Orr said in a wide-ranging interview. “The schedule we’re on, we should be able to get this done in 14 months, so I don’t anticipate a need for me to stay on.”
Detroit’s bankruptcy has marked a new low for a city formerly renowned as the cradle of the United States auto industry and central to America’s role as the “arsenal of democracy” in World War II.
The city’s population has fallen from its peak of 1.8 million people in 1950 to around 700,000 as manufacturing jobs moved elsewhere along with the white population. Financial mismanagement and political corruption have made things worse.
The bankruptcy process is expected to be protracted and rough on creditors, who have been offered pennies on the dollar for the city’s US$18.5 billion in long-term debt.
Orr said he anticipates “a lot of jousting” between creditors in federal bankruptcy court but warned that he expects virtually all the city’s creditors, even investors in the city’s general obligation bonds, will have to accept reduced payments as part of the bankruptcy process. “Most unsecured debt in bankruptcy gets a haircut,” Orr said. “That’s just what happens.”
General obligation bonds, which are backed by tax revenue, have long been considered the safest class of municipal debt.
Michigan Governor Rick Snyder, a Republican, appointed Orr as emergency manager in March to tackle Detroit’s financial crisis. In mid-July Snyder approved Orr’s request to file for a Chapter 9 municipal bankruptcy.
Orr said his team of lawyers and advisers is seeking to make it through a grueling schedule in federal bankruptcy court at a pace viewed as aggressive by most outsiders. It would leave Orr little time to focus on corrupt practices in the city’s past or on whether its borrowing was properly handled over the years. “I’m a draft horse with blinders on going uphill,” the emergency manager said.
Orr said he did not anticipate any form of bailout from the state of Michigan during the bankruptcy process but thinks there will be “a lot of state support upon exit (from bankruptcy), and I expect I’ll probably recommend to the governor and the state that there be some additional legislative oversight.”
US Bankruptcy Judge Steven Rhodes is to rule on whether Detroit is eligible for Chapter 9 protection in a trial to begin on October 23. Orr expressed confidence the bankruptcy filing will be approved.
If Detroit is found eligible for bankruptcy, the case will generate immense interest since there have been relatively few municipal bankruptcies over the past eight decades and none on this scale. Asked if he was concerned about the precedents Detroit might set, Orr said: “I’m a fiduciary for this city. I cannot be concerned about what dreams may come from the result of what we do.”
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