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Emergency Manager Kevyn Orr doesn’t have an exact date circled on the calendar, but in about two months he plans to make one of his biggest decisions: whether a Chapter 9 municipal bankruptcy is the best option for Detroit.
The decision will hinge on how much progress is made on a number of fronts, especially things that can dramatically change the city’s bottom line, like labor negotiations, asset sales or lease deals, and restructuring plans.
A week ago, Orr submitted his financial and operating plan to State Treasurer Andy Dillon. The plan, required by Public Act 436, the state’s emergency manager law, provides a big-picture road map of the cost-cutting and overhaul of city finances Orr has in mind.
Now that the report is public, Orr said during an interview with Crain’s last week, he will begin moving more quickly in tactical ways — including having discussions with the city’s four dozen labor unions in the next four to eight weeks.
When asked about the big bankruptcy decision, Orr said it all depends what can be done in about a two-month window. “If we’re negotiating, and we get to a term sheet,” he said. “That’s progress.”
Orr called bankruptcy a “messy and severe” process but a bargaining chip he’ll consider to get the job done.
Larry Gardner, owner of Troy-based turnaround firm Lawrence Gardner Associates Inc., said avoiding Chapter 9 will be an uphill battle. “How difficult is it? I think it’s a nine (on a scale) of 10 to do this,” he said.
Short of municipal bankruptcy, Orr would need consensus from a wide variety of employees and stakeholders.
Orr is moving briskly because of his 18-month mission (as spelled out by the state law) and the fact that by March, he estimates, the city won’t generate enough revenue to provide even the most basic of services.
“In my opinion, we are already insolvent,” Orr said. “In March 2014, we go off the cliff, underneath the line, never to come back. We are in mission critical right now. It just gets worse. March is free-fall.
“You call (police), the cars don’t come because there is no gas, not because they are too busy. That’s why there is a sense of urgency.”
Orr said the city will determine soon whether savings should be achieved by outsourcing trash collection ($15 million annually), power grid operations ($30 million annually) and Detroit Water and Sewerage Department operations ($50 million to $70 million annually). Meanwhile, decisions on city department consolidation or elimination will “be coming very quickly,” he said.
Those are just some of the ways Orr, who was appointed last March by the state’s Local Emergency Financial Assistance Loan Board, says he can turn around the city’s finances.
Patrick O’Keefe, founder and CEO of Bloomfield Hills-based turnaround specialists O’Keefe and Associates Consulting LLC, called Orr’s bankruptcy timeline “a negotiating ploy rather than a real threat.” “He should exhaust all sorts of possible restructuring objectives before he says ‘Chapter 9,’ ” O’Keefe said.
Within two months, Orr won’t be able to bargain with all of the city’s labor unions, O’Keefe said. “If he spends a day with each union going through their proposal, that doesn’t leave them a whole lot of time,” he said. “Bargaining in good faith implies that there will be a back and forth.”
Lisa Gretchko, a bankruptcy attorney and member of Royal Oak-based Howard & Howard Attorneys PLLC, said the city must try to avoid bankruptcy because it can’t afford the hundreds of millions of dollars it would likely cost. Plus, she said, there would be lingering side effects for the city and surrounding communities.
“The people who think they are entitled to be treated in a certain way, if they take a sort of scorched-earth approach or draw a line in the sand, everybody pays the price — literally,” Gretchko said.
Orr would have to receive written approval from Gov. Rick Snyder to file a petition for Detroit’s bankruptcy. The petition and a bankruptcy plan would be filed in federal court, and the city’s creditors would vote on the plan.
Crunching the numbers
Detroit’s financial problems run deep, Orr said.
The city borrows $75 million per year on average, and this fiscal year has borrowed $167 million. Detroit has taken in $100 million less than it spends, on average, for the last five fiscal years, according to the report.
Only by issuing more debt has Detroit been able to pay its bills. Its long-term debt is around $15 billion, which includes general fund debt of $1.1 billion, enterprise fund debt of $6 billion, pension obligation certificate debt of $1.8 billion, and other post-employment benefit obligations of $5.7 million, according to the 44-page financial report.
“How are you going to pay that?” Orr said. “Are you going to just keep borrowing debt? You’re just digging a hole.
“The thing that shocked me (when compiling the report) was there is no exit strategy. If we don’t (fix) this, that $5.7 billion becomes $7 billion. Ten years from now, the aggregate (debt) data of $15.6 billion becomes $21 billion. The gap just gets worse.”
The city also has a budget deficit of an estimated $380 million. Orr cautioned that, despite the ambitious restructuring plans in progress, the city won’t be transformed overnight.
“If you want to go from Detroit to Bel Air, that’s not going to happen in two months, but you can go to Detroit with a better functioning government,” Orr said.