It’s sometimes said that government doesn’t build great things anymore. This is not completely true. Governments still build airports. And they often build them in their own image. Airports are leviathan structures, impersonal, blandly similar, and maddeningly confusing for average citizens.
So it was appropriate that Detroit Emergency Manager Kevyn Orr held his “come to Jesus” meeting with city creditors Friday morning at the Detroit Metro Airport Westin. The path from John Dingell Drive, into and out of the labyrinth parking structure, through the hotel’s winding corridors, and down escalators that turn into stairs, and finally into the lower-level meeting room was a route as tangled as the municipal finances Orr can to discuss with Wall Street bankers and other creditors.
Sorting through Detroit’s books has taken more than a year of work by city employees, outside consultants, and accountants. Even presented on a neat and tidy PowerPoint with informative spreadsheets and elegant fonts, the city’s financial outlook is neither neat nor tidy.
Detroit’s total long-term debt obligations add up to roughly $18 billion.
The $11.449 Billion Dollar Question
The good news, or at least the less awful news, is that about $6.5 billion of the city’s debt will be paid by identified funding sources such as Water and Sewerage revenue. The remaining $11.449 billion is unsecured debt.
Orr and his team gathered Friday to tell the unsecured debt holders they shouldn’t ever expect the city of Detroit to cough up $11.449 billion to pay off these obligations. The money just isn't there.
Orr is proposing, as an alternative to bankruptcy, offering creditors a $2 billion note to satisfy the city’s obligations. The note accrues just at just 1.5% interest so, according to Team Orr's report, when inflation and all the mathematical voodoo is factored in, it works out to an effective payment of less than a dime on the dollar.
That number is marginally worse than it sounds for retirees. The portion of pension and health care costs that have been funded are as good as gold. Outstanding obligations, due to chronic underfunding by the city, would be paid by the less than dime on the dollar scheme.
For example, according to Orr’s data, the city’s projected positive cash flow of $4 million for fiscal year 2013 only exists because city leaders deferred millions in pension contributions. Pensioners shouldn't expect full re-payment on those deferrals.
“The city is not making its pension contributions as they come due,” Orr’s 62-page “Proposal To Creditors, Executive Summary” reads. “The city has deferred payment of its year-end Police and Fire Retirement System (“PFRS”) contribution (and finances such deferrals at a rate of 8%). As of May 2013, the city had deferred approximately $54 million in pension contributions related to current and prior periods and will defer approximately $50 million on June 30, 2013 for the current year PFRS pension contributions. Therefore, by fiscal year end, the City will have deferred over $100 million of pension contributions.”
It’s those deferred payments as well as unsecured bonds that, like a hippie drafted into the Army, will get the haircut treatment if Orr’s restructuring plan takes effect.
If things continued on their current trajectory without restructuring, Orr's report claims, the pension funds will end up insolvent in the long run.
The dire news delivered by Orr’s financial projections didn’t end there.
Without real restructuring or further accounting gymnastics, Detroit will have a negative cash flow of $198.5 million in fiscal year 2014.
Many legacy costs are also projected to double or triple next year without drastic changes. The city’s contribution to public safety pensions in FY 2013 was $46.1 billion, in FY 2014 it’s expected to be $139 billion, by FY 2015 it will be $163 billion, and so forth.
There’s also more than one billion dollars in outstanding general obligation bonds, with roughly $350 million secured by a liens tied to state aid.
The Kind Of Good News
There were a few slim silver linings in Orr’s projections.
Orr believes the gap in health care coverage for city employees and retirees can be made-up with a patchwork of programs created by the Affordable Care Act, health care exchanges, and Medicare.
Orr’s report also envisions a $1.25 billion investment in long-term improvements over the next decade to remove blighted property, bolster public safety and lighting services, and modernize the city’s administration of service.
All of this, the debt restructuring and infrastructure investment, is contingent on buy-in for the creditors—pensioners, employees, and Wall Street bankers, alike.
Even before Orr’s meeting let out, the Police and Fire and General Retirement Systems released a joint statement that suggests they’re hopeful the EM's proposal is just an opening offer.
“Over the last year, the City did not keep its agreement with either of the Retirement Systems’ Boards of Trustees to pay agreed upon employer contributions,” their statement read. “However, during that same time period, the City consistently paid all obligations owed to its bondholders. The Emergency Manager is now seeking dramatic concessions from the 12,000 police and fire and 18,000 general City employees and retirees to reduce the deficit. There must be equitable sharing.”
The question all creditors must now discuss amongst themselves is whether or not their best path toward that equitable sharing of pain is at Kevyn Orr’s bargaining table or in a bankruptcy court.