Representatives of Detroit's creditors leave a meeting after being told they'll get no more than 10 cents on the dollar of what they're owed.
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DETROIT — Detroit emergency manager Kevyn Orr laid out Friday a complex and painful path back to solvency for Detroit in a proposed plan to creditors that promises the city a way out of its financial mess.
Mr. Orr’s plan would spin off the city’s water department, reduce city-provided health care for retirees and workers, and immediately stop debt payments. The city missed a $39.7 million payment to an unsecured creditor Friday.
Detroit Emergency Manager Kevyn Orr said there is little room to negotiate the deal.
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The money for such payments instead will be used to keep the city operating.
The plan calls to reinvest $1.25 billion over the next decade to boost services such as police and fire, step up blight removal, and transform the operations of an antiquated, failing city government.
With Friday’s missed $39.7 million payment on debt issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978.
Unsecured creditors may get 10 cents on the dollar under a deal Mr. Orr offered to more than 100 creditors and union representatives Friday.
Active and retired city workers will face “significant cuts in accrued, vested pension amounts,” according to the report, which said that the general retirement system and police and fire system are underfunded by about $3.5 billion.
“We’re starting our first step,” Mr. Orr said. “This isn’t meant to be hostile or it’s not meant to be combative. This is meant to be an acknowledgment and a recognition of the realities that we can no longer deal with.”
Mr. Orr was appointed by Republican Gov. Rick Snyder to oversee Michigan’s largest city.
Highlights of Orr's report:
--Imposed a payment moratorium on $11.5 billion of unsecured debt, including a $34 million payment due on Friday for $1.43 billion of taxable pension certificates of participation (COPs).
— Creditors holding $650 million of Detroit unsecured general obligation (GO) debt and about $1.4 billion of COPs, as well as claims by pensions underfunded by $3.5 billion and undetermined claims for retiree healthcare, would be satisfied with pro rata shares of $2 billion of new, non recourse participation notes paying interest of 1.5 percent a year;
— Owners of $480 million of Detroit secured general obligation bonds and other secured debt be treated in line with the value of collateral, with the biggest holders of secured securities accepting new bonds;
— Public pension fund obligations be overhauled to align with the city’s available funding;
— Changes be made in retiree healthcare insurance, which would see many former city workers getting coverage through Medicare and the healthcare exchanges being organized under President Obama’s healthcare reforms;
— Detroit continue to stay current with obligations to city workers and vendors;
— Officials establish an oversight board to ensure changes in finances and operations are long lived;
— The city’s water and sewage operations, which serve Detroit and 127 suburbs, be run by a separate entity called the Metropolitan Area Water and Sewer Authority, or MAWSA, that will issue new bonds to replace outstanding debts totaling about $5.4 billion.
Source: Office of Emergency Manager, City of Detroit
Under Mr. Orr’s offer, creditors must decide whether to accept deep losses or try their chances in court, where federal law may trump Michigan laws that protect bondholders.
According to the 128-page proposal, the $11.5 billion in unsecured claims include $5.7 billion in post-retirement benefits, $1.43 billion in pension obligations, and $530 million in general-obligation bonds.
The halted debt payments may extend to the unlimited-tax and limited-tax general obligations. Such debt is backed by Detroit’s full faith and credit and taxing authority, rather than a defined revenue stream.
The plan will enable negotiations that Mr. Orr said may last through August.
If progress stalls, Mr. Orr can file for bankruptcy, something he wants to avoid. “We think there may be some room for negotiation, but not a lot,” Mr. Orr said. “We don’t have a lot of extra cash or a lot of elasticity.”
A 2012 state law gives the emergency manager authority to cut spending and services and to impose new terms for employee contracts, including wages and benefits. He also can sell assets and would be the city’s representative in bankruptcy.
Mr. Orr’s proposed concessions stem from a May 12 report in which he detailed the dire finances of a shrunken city of 701,000 that’s kept itself afloat only by borrowing and skipping payments to pension funds. Since 2008, the city has spent an average of $100 million more than its revenue each year, the report said. The long-term liabilities drain money from a $1.1 billion general fund, the report said.
Detroit’s revenue fell as its population declined and home values dropped.
Once among top U.S. cities by population, it has lost more than a quarter of its residents since 2000, to about 701,000 last year. That’s fewer than half its postwar peak in 1950.
City income-tax receipts have fallen 40 percent since fiscal 2000, to $233 million in 2011, while the jobless rate has tripled and property values declined. State aid has fallen 48 percent, to $173 million in 2012 from a peak of $334 million in 2002.
“The average Detroiter has to understand this is a culmination of years and years of kicking the can down the road,” Mr. Orr said. “We can’t borrow any more money. We started borrowing from our own pension funds.”