Detroit (9845MF), on the brink of bankruptcy with $17 billion in liabilities, will suspend payments on $2 billion of unsecured debt, beginning with an installment due today, Emergency Manager Kevyn Orr said.
With today’s missed $39.7 million payment on obligations issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978. Unsecured creditors may receive as much as 10 cents on the dollar under a deal Orr offered today to more than 100 creditors and union officials.
The city would create a regional water agency to replace its municipally run department, and active and retired workers would see their pensions reduced under the plan. Detroit also would spend $1.25 billion over a decade to improve services, eliminate blight and create a more livable community.
“We have to strike a balance between the legacy obligations to our creditors and our employees and retirees and the duty as a city to 700,000 residents for lights, police, fire, emergency management, cleaning the streets,” Orr told reporters after the meeting.
Orr was appointed by Republican Governor Rick Snyder to oversee Michigan’s largest city, the former auto-manufacturing giant that is home of General Motors Co. (GM) Thanks to Orr’s offer, made in a meeting at a Detroit Metropolitan Airport hotel, creditors must decide whether to accept deep losses or try their chances in court, where federal law may trump Michigan (BEESMI) laws that protect bondholders.
Detroit, where officials struggle to provide public safety and even street lights, joins California (BEESCA) cities Stockton and San Bernardino in trying to stick bondholders with a loss. Jefferson County, Alabama, on June 5 reached an agreement to end the current record municipal bankruptcy by offering its largest creditors 60 percent of what they’re owed.
According to Orr’s 128-page proposal, the $11.5 billion in unsecured claims include $5.7 billion in post-retirement benefits, $1.43 billion in pension obligation certificates and $530 million in general-obligation bonds.
After the meeting, Standard & Poor’s lowered the rating on the city’s general-obligation debt to CC from CCC- with a negative outlook. That’s 10 steps below investment grade. Fitch Ratings reduced Detroit’s unlimited-tax and limited-tax general obligations, along with its pension-obligation certificates, to C, which signals “imminent default.”
The halted 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.
“It’s going to have an impact” on the $3.7 trillion municipal-bond market, said Bill Nowling, Orr’s spokesman, said before the meeting. “But we’re at a crossroads.”
Nowling wouldn’t say whether the city would miss its next general-obligation bond payment, saying it is “going to go month to month.”
About $479 million of that debt is considered secured because it’s supported by state aid and is “subject to negotiation with holders,” Orr’s report said.
The city has about $5.3 billion of bonds backed by revenue from the water and sewer systems, according to the report.
Future bond sales would come from a newly formed Metropolitan Area Water and Sewer Authority, according to the report. The agency would operate the system and the city would continue to own the assets.
The plan will frame negotiations that Orr said may last through August. If progress stalls, Orr can file for Chapter 9 bankruptcy, a move he has said he wants to avoid.
“We think there may be some room for negotiation, but not a lot,” Orr said today. ‘We don’t have a lot of extra cash or a lot of elasticity.’’
Meeting participants emerged and immediately started making calls and texting on mobile devices that had been confiscated to assure attention was paid. Most declined to comment when asked for their reactions to Orr’s offer.
Union leaders want to learn more about the deal during a meeting with Orr on June 20, said Yolanda Langston of Service Employees International Union Local 517M in Detroit.
“The best I can say is, ‘We’ll see,’” Langston said in after the meeting.
While many creditors avoided commenting, GM and Auburn Hills, Michigan-based Chrysler Group LLC, both of which went through U.S. government-backed bankruptcy reorganizations in 2009, expressed support for the city.
“We hope all parties can come together and take action to build a stronger city,” Greg Martin, a GM spokesman, said by e-mail.
“Chrysler Group firmly believes in the City of Detroit and its people, as evidenced by our continued investment in the city and its residents,” the automaker, majority owned by Fiat SpA, said in an e-mailed statement. Last year, the company moved about 70 employees downtown after leasing the top two floors of a 23-story structure and renaming it Chrysler House.
A 2012 state law gives Orr authority to cut spending and services, and to impose new terms for employee contracts, including wages and benefits. He also can sell assets.
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.
Orr’s proposed concessions stem from a May 12 preliminary 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, according to the report.
The long-term liabilities drain money from a $1.1 billion general fund, the report said.
“We have to get our arms around legacy debt in order for the city to return to its previous level of prominence,” said Jack Martin, Mayor Dave Bing’s chief financial officer, as he left the meeting. The mayor and City Council lost power when Orr took office.
Detroit’s revenue fell as its population declined and home values dropped. Once among the top 10 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 of 1.8 million in 1950.
The city’s income-tax receipts have dropped 40 percent since fiscal 2000, to $233 million in 2011, while the jobless rate has tripled and property values declined.
“We’re starting our first step,” 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.”
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