Reuters: Bankruptcy News: RPT-UPDATE 1-Detroit emergency manager: city "clearly insolvent"

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RPT-UPDATE 1-Detroit emergency manager: city "clearly insolvent" May 13th 2013, 14:41 Mon May 13, 2013 10:41am EDT By Nick Carey and Steve Neavling May 13 (Reuters) - Michigan's biggest city is "clearly insolvent" and needs many fixes including to its pension system and labor agreements to address its problems, according to a report outlining the state of Detroit's finances. "The City of Detroit continues to incur expenditures in excess of revenues despite cost reductions and proceeds from longterm debt issuances," the city's recently installed emergency manager, Kevyn Orr said in his first report. "In other words, Detroit spends more than it takes in - it is clearly insolvent on a cash flow basis." Detroit had only $64 million in cash on hand and current obligations of $226 million on April 26, 2013-a negative net cash position of $162 million, the report said. Operating expenditures have exceeded revenues by about $100 million a year since 2008, according to the report. The city had an accumulated $326.6 million unrestricted deficit. Detroit is projected to add an additional $60 million to the accumulated deficit balance when the current fiscal year closes June 30. The city will make $31 million in pension payments this year, but will defer another $108 million in pension payments. Orr stated that a city task force is reviewing the plans and whether actuarial assumptions are accurate and funding is adequate. The city also has $5.7 billion in unfunded retiree benefit obligations. All told, Detroit has liabilities totaling $9.4 billion in a variety of areas: special revenue bonds, revolving loans, pension obligations and other financial instruments. "Debt service payments place a significant strain on the city's budget," the report states. The city's retiree pool currently outnumbers active employees by a 2 to 1 margin that is growing, the report said, so Detroit "must address pension and retiree healthcare liabilities as part of any comprehensive restructuring." On the labor front, Orr signaled he is prepared to take a hard line with the city's unions. Noting that the state law authorizes him to "reject, modify or terminate" any of the city's 48 collective bargaining agreements, Orr states that he is considering all options. "This power will be exercised, if necessary or desirable, with the knowledge and understanding that many City employees already have absorbed wage and benefit reductions," the report states. The report also notes that a review of police, fire and other emergency services is ongoing and that Detroit's "infrastructure and public safety fleet are aged and decrepit, which, in turn, increases the City's operating and repair costs and decreases its productivity." The police and fire department both are in need of restructuring, Orr found. Detroit must also evaluate "interest rates, amortization, outstanding principal amounts, security interests, legacy liabilities and all other aspects of short and longterm debt" as part of a "comprehensive restructuring." "Significant and fundamental debt relief must be obtained to allow the City's revitalization to continue and succeed," the report says. Orr was installed by Michigan's Republican Governor Rick Snyder in March to try to fix Detroit's finances through bankruptcy if necessary. The city has been running a deficit of around $100 million a year. In his report, which was required by law, Orr says the city has obligations of "at least" $15 billion, some $2 billion more than previously thought and will end this year with a deficit of $125 million. Orr's report says Detroit is projecting a positive cash balance through December 2013, adding "this is only as a result of the significant amount of payment deferrals and amounts borrowed from, and owed to, other funds, which is clearly not sustainable in the long run." "Structural change must occur to address the City's operating deficit and cash burn," the report adds. Detroit "will need to make significant investments to upgrade capital assets so that it can provide necessary services to its citizens and residents." Orr's report also notes that changes to the city's charter and legislation may be required to reduce bureaucracy and improve operations. Link this Share this Digg this Email Reprints

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