5/20/2013 4:29:56 PM
By Bernie Woodall and Karen Pierog
Kevyn Orr, a former bankruptcy lawyer, in his first report
to the state of Michigan since Governor Rick Snyder appointed
him, laid out last week a bracing picture of steps he may need
to take to address the city's troubles.
As he has gone about his work, though, with unions, bond
insurance firms and others, Orr so far has communicated little
about how they will be affected.
Orr's spokesman, Bill Nowling, said the emergency manager
expects to decide soon whether talks with the affected parties
will get the job done. "It's safe to say we will have a good
idea of whether we can reach an out-of-court restructuring with
our bondholders, pensioners, retirees and city employees within
six weeks," Nowling said.
"This is not going to be a prolonged process. We are in a
The Detroit story has taken on outsized importance. Once a
symbol of U.S. industrial might, the city now represents
something different altogether: a case study of the struggles
many U.S. cities and states are enduring as they grapple with
crippling debt and untenable obligations to public workers.
And as Orr begins initial talks with Detroit's employees and
creditors, the process raises worrisome parallels with historic
precedents close to home. Five years ago, the leaders of General
Motors and Chrysler were undertaking similar preliminary steps
with their creditors and workers, only to find that negotiations
and concessions were not enough to avoid bankruptcy. Orr
represented Chrysler during its restructuring.
Orr is moving forward on two major fronts: with creditors
and workers. With bond holders and bond insurers, he is sending
signals - but has not yet met with them. He is taking an
aggressive approach to the unions representing the city's public
safety workers but has not yet sat down with dozens of others.
Ideally, restructuring experts said, all stakeholders should
be invited to participate early in the process.
Detroit's debt is one of Orr's top targets because payments
on the $2.9 billion of general fund debt - including $1.45
billion of pension obligation certificates and associated
interest rate swap contracts - accounts for about 19 percent of
the city's general fund budget, Orr reported to the state.
Orr last week said Detroit will have enough cash to meet
obligations through December, though portions of pension
payments may again be deferred. In the 2014 fiscal year, which
begins July 1, Detroit will need to pay $565 million to service
its debt and another $112 million toward pension obligation
certificates, according to a preliminary budget Orr released
In dealing with the city's $15 billion debt load, Orr has
laid out the broad outlines of how he would like to proceed. But
he has provided few details and initiated no direct contact with
bond holders or the insurance companies that have written
policies guaranteeing payment on most of the city's debt.
BOND INSURERS ARE KEY
Bond insurance firms often are among the first to be
approached, since they must reimburse bond holders in the event
of a default or bankruptcy by the city.
James Spiotto, a municipal bankruptcy expert at law firm
Chapman and Cutler, said bond insurers are key to any
restructuring talks. In the event of a debt restructuring or
bankruptcy filing, insurers could be required to make payments
to bondholders, and would seek to recover funds from the city
through the bankruptcy process.
But Kevin Brown, a spokesman for bond insurer MBIA Inc
, which through a subsidiary has insured more than $2.5
billion in Detroit bonds, said the company has not heard from
Detroit since Orr came in.
"I have no doubt we will be speaking with the city at some
point in the future," Brown said.
Even before Orr's report, some insurers had indicated
through communication to bondholders that they expect to be
stepping in to make payments on Detroit bonds.
Adam Bergonzi, chief risk officer of National Public Finance
Guarantee Corp, in a statement released in March stated that
National is prepared to pay on any claims. "Should the city of
Detroit fail to make a required debt service payment for any
reason, including a bankruptcy filing, National's insured
bondholders are guaranteed their scheduled interest and
principal payments on time and in full," he wrote.
Certain classes of debt may get through without
restructuring. For example, Assured Guaranty said
payment streams for $1.8 billion of water and sewer revenue
bonds it insured should be safe.
"These obligations are secured by a pledge of 'special
revenues,' and therefore timely payment of debt service should
be insulated from any financial difficulties of the city," the
Assured also insures exposure to $321 million of Detroit's
general obligation and general fund debt.
Orr in his report outlined four steps he will consider in
deciding how to restructure Detroit's debt: by pushing principal
payments into future years, permanently reducing the amount of
principal, lowering interest rates, and issuing new debt to
provide cash recoveries to creditors.
Moody's Investor Service warned of negative implications for
Detroit debt soon after Orr issued his report. Orr's language in
the report with regard to debt was similar to that used by other
municipalities that have filed for bankruptcy, Moody's noted.
Orr has moved more directly in dealings with the city's
public-safety unions, though discussions with several other
union groups have not yet begun.
Dan McNamara, president of Detroit Firefighters Association,
said Orr did not mince words when he met with the union before
Orr issued his report.
"He said, 'Let's be very clear. I'm in charge. I can impose
a contract on you. I would like to sit and talk with you and get
information. I'm not obligated to negotiate with you under the
law,'" McNamara said.
Leaders for much of the city's unionized workforce say Orr
has not responded to their efforts to contact him.
Edward McNeil, the lead negotiator for a coalition of 33 of
Detroit's 48 union bargaining units, said union officials have
mailed letters, hand-delivered letters, sent emails, made phone
calls, and even recorded a video plea to Orr, asking for a
meeting with the emergency manager.
"We have not gotten any kind of a response from him to this
date," McNeil said on Friday. "You have a person who comes in
and says 'I'm trying to right the city,' and then we don't get a
response from him at all?"
They are waiting anxiously, union leaders said, because all
Detroit workers - from police to firefighters to those
represented by AFSCME and other unions - have taken several
rounds of pay reductions already. They fear benefits such as
pensions and healthcare are next on the chopping block.
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