Detroit Emergency Manager Kevyn Orr entered negotiations with city creditors on Friday, the likes of which may never have been seen before. To conquer the city's $386 million deficit and mammoth debt, Orr asked for significant concessions on loan repayments, says the Detroit Free Press. Large-scale negotiations with everyone from investor on down being asked to take cuts are rare, but municipal bankruptcy continues to loom for the city.
Magnitude of Detroit Debt
Along with astronomical deficit, Detroit owes somewhere between $15.8 billion and $17 billion in bond debt, mostly from pension and health care obligations. A debt of $17 billion would mean Detroit's liabilities equal about $25,000 per resident. Asset-to-debt ratio could be as high as 33-1 ($33 of debt for every dollar in assets). General Motors was 20-1 when it went into bankruptcy.
Cuts Aren't Enough
City workers have taken cuts. Unions have made concessions. Services have been cut. Lights have been shut off. Detroit local Marya Voskil said, "You could cut everything, shut off all services -- water, sewer, lights, police, fire, schools -- and the debt would exist and it would grow. We love to blame Kwame [Kilpatrick] for screwing us over. But it goes way beyond him. A lot of loan sharks have been making a lot of money off Detroit for a long time for us to owe that much."
Detroit's Mercurial General Obligations
Investors are chancing Detroit's uninsured general obligations that have netted record-high rise in yields -- upwards of 16.3 percent. Some investors are counting on the emergency manager to pay them back full muni credit, says Bloomberg Businessweek. John Miller of Nuveen Asset Management, Detroit's second-largest debt holder, says Michigan's emergency manager law guarantees municipal creditors repayment of all they're owed.
Orr's '10 Cents on the Dollar' Offer
If Orr files Chapter 9 municipal bankruptcy, federal law could supersede state EM law promises and reduce repayment amounts. An aide to Orr said, "We want to put everyone on notice that we're going to treat them equally. We're not going to pit union stakeholders against creditors." That means equal share in the responsibility. Creditors couldn't expect anything like payment in full -- more like 10 cents on the dollar repayment, says WXYZ. Orr said Detroit's 707,000 residents matter most. The threat of that low-ball offer resulted in Standard & Poor's dropping Detroit securities four levels, to a CCC- rating (nine points below investment grade), says Bloomberg Businessweek.
Detroit BankruptcyState Treasurer Andy Dillon spoke on Detroit's ongoing financial crisis at Michigan's Mackinac Policy Conference in May, reports the Detroit Free Press. He said the city could pull through thanks to emergency management. Orr handled Chrysler's bankruptcy. Dillon said if Chapter 9 seems the best alternative, the state will support it, so long as basic services are still provided. The Detroit Free Press says Orr hopes to avoid expensive legal battles, but an agreement with creditors isn't expected soon.
An educator, political junkie, and Michigan native, Marilisa Sachteleben writes about issues in her state's most pivotal city of Detroit.