Detroit's Emergency Financial Manager, Kevyn Orr, had bad news for the beleaguered city's creditors today: Detroit has made the strategic decision to stop paying down some of its billions of dollars in long-term debt in order to try and keep the city afloat.
"Detroit's road to recovery begins today," Orr said in a meeting with as many as 150 of the city's creditors. "Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin."
Orr, a bankruptcy attorney hired by Michigan to try and fix Detroit's money woes, went on to say that he believes there is still a 50-50 chance Detroit will go bankrupt. If Detroit did have to file for Chapter 9 bankruptcy, it would be the first major city in American history to do so, according to a bankruptcy expert who spoke to Reuters.
Reuters also reports that Orr's plan to forego debt payments began immediately, with a skipped $34 million payment due today:
The moratorium on principal and interest payments on the city's unsecured debt, including a $34 million payment on pension certificates of participation due on Friday, would allow the city to conserve cash needed to provide services to residents, Orr said.
Unsecured creditors, including bondholders and pension funds, will receive a pro rata share of $2 billion of notes the city would issue and pay off as its financial circumstances improve.
"Retirees, bondholders and city workers are being offered pennies on the dollar for the enormous amount of unfunded liabilities," writes Gawker Media's own Jalopnik. "The city has no money to pay it back. It's as simple as that."
Orr's plan, Proposal for Creditors, found here [PDF], further recommends putting the city's water and sewage department into the hands of an independent body still owned by the city but managed by a board of representatives from the city and its suburbs.
Another Orr suggestion sure to stoke ire—and possibly lawsuits—is a potential cut to current and retired city workers' pensions. "Orr said flatly that he does not believe Michigan’s constitution protects vested retirement benefits from a city that cannot afford them," wrote the Detroit Free Press, "an issue likely to face a court battle from retirees who believe their pensions are shielded from cuts under state law."
Orr's recommendation that the city spend more than a billion dollars on removing blight and updating city services over the next decade did little to squelch the fears of some city workers, who couldn't help but focus on the deep and serious cuts Orr is advocating.
William Miller, a representative from the International Union of Operating Engineers, told the Free Press, "It’s very frightening. There are a lot of people retiring soon. It’s not just the retirees saying, 'What’s going to happen to us?'"
President of the Detroit Firefighters Association Dan McNamara said, "The message they told us is we’re in a death spiral." Though he added that he disagreed with Orr's assessment of the city's police and fire pensions as being underfunded.
When the Free Press told him McNamara believed the pensions were fine, Orr said, "I am more than prepared to engage in that discussion. We have different information."
[Image via AP]