The Equity Factor

Detroit’s Finances Are More Terrible Than We Knew, Yet No Bankruptcy In Sight

Detroit could run out of cash as soon as the end of the fiscal year, which is next month. Despite the financial hardship, the city may be able to avoid declaring bankruptcy.

Detroit is facing a $326 million deficit. Credit: Flickr user dharder9475

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Detroit Emergency Manager Kevyn Orr, as was expected when Michigan Gov. Rick Snyder appointed him in March, has declared the city insolvent and facing even more financial challenges than previously known. Detroit could run out of cash as soon as the end of the fiscal year, which is next month.

Orr, who is no stranger to Detroit and was Chrysler’s bankruptcy lawyer in 2009, laid out the city’s dire financial circumstances in a 41-page report delivered to State Treasurer Andy Dillon today. Orr called it a “sobering wake-up call,” noting that the city couldn’t pay off its debts solely on revenue in 20 years if it wanted to.

“No one should underestimate the severity of the financial crisis,” Orr said in a statement issued by his office on Sunday. “The path Detroit has followed for more than 40 years is unsustainable and only a complete restructuring of the city’s finances and operations will allow Detroit to regain its footing and return to a path of prosperity.”

The report is a guideline for trimming down and restructuring the city’s $15.7 billion in debt and long-term liabilities. If there is a silver lining, it’s the absence of any mention of bankruptcy in the report. And Orr has maintained in his short 45 days as emergency manager that he’d like to avoid a Chapter 9 filing.

What is it that ails the city’s ledgers? Since there isn’t enough time in the day to explain Motor City’s checkered past of poorly managed finances (not to mention a continually shrinking tax base), we’ll stick to the fundamentals of Orr’s report.

Detroit for years has had some of the strongest unions in the country. The health care that comes with those unions may be on the chopping block — for current and retired employees — because of a $5.7 billion unfunded health care benefit. (My grandmother, the widow of a retired Detroit firefighter, has seen her benefits cut more than once in the last decade.) The Detroit General Retirement System (DGRS) and Police Fire Retirement System (PFRS) pension fund, long thought to be one of the few remotely stable funds in the city, could be in trouble, too. In June 2011, the DGRS claimed it was 83 percent funded, and the PFRS 100 percent. The report says the funds’ assets were more than $1 billion less than the actuarial assumptions. Orr has requested 56,000 pages in documents from the pension boards, according to the Detroit News.

City employees who dodged wage reductions last year may be next in line. As emergency manager, Orr can lay out new contract terms if union leaders aren’t willing to make concessions.

Detroit Mayor Dave Bing and the city council made budget cuts before Orr’s appointment, but the deficit still stands at $326 million and is expected to reach $380 million before the fiscal year ends on June 30, when Orr said the city simply cannot borrow more money to hide its current debts.

The report is a roadmap — albeit a wildly depressing one — for a path back to health and some form of stability. What it looks like, I doubt Orr even knows. He has the next 60 to 90 days to work with creditors and union leaders to hammer out a restructuring package, which is just the beginning.

The Equity Factor is made possible with the support of the Surdna Foundation.

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Bill Bradley is a writer and reporter living in Brooklyn. His work has appeared in Deadspin, GQ, and Vanity Fair, among others.

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Tags: economic developmentdetroitequity factorbudgetsbankruptcy

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