Monday, May 13, 2013

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

Reuters: Bankruptcy News
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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.  
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