A hearing on Friday gave a preview of the daunting task Detroit is facing – including paying back over 23,500 retirees
The city of Detroit, which owes $18bn to its creditors, may have to wait until after Halloween to see if it will be allowed to file for bankruptcy and it may be Christmas before the city has a feasible plan to operate and pay off its debts – and that's the fast track.
A hearing presided over by US bankruptcy judge Steven Rhodes today gave a preview of the daunting task facing Detroit, its retirees and the courts in unwinding the city's extensive financial obligations and deciding whether it is eligible to file for bankruptcy, in defiance of state law. Detroit this week filed documents listing all the people to whom it owes money; the list, which includes around 23,500 retirees, extends for over 3,500 pages.
Since it attempted to file for bankruptcy on July 18, Detroit's future has been hotly debated by factions for and against allowing the city to admit financial failure. Proponents, like the city's emergency manager Kevyn Orr, argue that a bankruptcy will allow Detroit will to be able to wipe its financial slate clean and reduce its debts. Opponents, including retirees, argue that the city has incorrectly judged its debts and that they are being asked to give up more than they should.
Time haunts the proceedings. In the hearing, according to press reports, a lawyer for Detroit named David Heiman argued that the city has to hurry. "Time is our enemy. The facts are not going to change no matter how long we wait," Heiman said according to The Detroit News.
Still, many question whether the city has a realistic timetable. Brad Reynolds, chief investment officer for investment firm LJPR, has investments in municipal bonds and said cities normally do not have the luxury of speedy bankruptcies.
"The cases we do have to point, last two or three years. When the emergency manager said he was going to get this done by the end of the year, it's like 'you're not really living in reality,'" Reynolds said. "I think you're looking at years of legal battles and court rulings."
While that happens, Detroit will have to find a way to maintain interest payments on its current bonds. Its next payment is in mid-August.
Jane Hudson Ridley, a senior director who oversees Detroit's credit ratings for Standard & Poor's, said she is watching the judges' decisions closely and that S&P will be ready to declare any of Detroit's bonds in default if the city fails to make its interest payments. The ratings firm has had Detroit rated below investment grade - meaning that its bonds were at high risk for default - for over four years, an indicator of the city's long downward slide.
Even if Detroit comes up with a plan of adjustment by December, as it hopes to, that is only paperwork, Ridley said. It won't answer the larger question of how Detroit plans to pay its bills in the future.
"They don't even have the revenue to support operations," Ridley said. "Detroit's problem is that the revenues don't match up with the expenditures."
The city's problems center around its declining population, which has led to lower income tax and property tax revenues. The city does not have enough residents to pay its bills, which leaves it in a catch-22: to attract residents, it needs to invest money in economic growth but without economic growth, it will be unable to attract residents. "You have to grow the tax base, which has to come from further investment in the city," Ridley said.
Much of the discussion in court today, and over the next year, will be about whether Orr, the emergency manager, is running the bankruptcy process fairly and, in particular, has a strong grasp on how much money the city's pension funds have.
Orr has claimed that the city's funds for retirees are $3.5bn in debt and lack the money to pay pensions. The two funds have retorted that they are 90% funded. A new study from the Wall Street publication the Bond Buyer supports the retirees' numbers. In court today, Judge Rhodes gave the retirees notice that they would have to organize into a committee fast and submit their objections to Orr's plan.
The prospect of a Detroit bankruptcy, historic in size, has upset the normal notions of how bankruptcies should work. Usually pensions are considered sacrosanct, but a municipal failure this big has created a scrum of creditors and Orr has overturned their ideas of who should get paid first.
"Normally you have a pecking order of where the creditors stand in line to get paid," Reynolds, of LJPR, said. "The way the EM is trying to do this, there is no pecking order. That definitely is making people a little bit on the nervous side."
The next hearing on the case is August 21.
