Detroit Creditors’ Haircut: 90 Percent

By:  Bob Adelmann
06/17/2013
       
Detroit Creditors’ Haircut: 90 Percent

Detroit's Emergency Manager Kevyn Orr gave just two options to those creditors gathered in downtown Detroit on Friday: Go along with my proposal now, and you'll get the best deal you can. Don't, and you'll get less, it'll cost more, and it will take longer.

At the conclusion of Friday’s two-hour meeting of more than 180 of Detroit’s creditors, unions, and pension trustees, Emergency Manager Kevyn Orr’s plan to rescue the city from bankruptcy was met with predictable responses: lawsuits and strikes.

It was an altar call to accept reality, but denial, anger, and threats were the response of many. One unnamed bond holder said, “It’s just too much. It is an unprecedented amount to ask.” Mike Mulholland, secretary of American Federation of State, County and Municipal Employees (AFSCME) Local #207, was equally blunt: “When you’re backed into a corner, the only thing you can do is fight and the only way we can fight is to strike.”

Orr was ready for them. In his 134-page proposal, he blamed “financial mismanagement, a shrinking population, [and] a dwindling tax base … over the past 45 years [which] have brought Detroit to the brink of financial and operational ruin.” Indeed, his proposal spelled out the denial of reality that Mayor Dave Bing and his city council had been enjoying for years when it showed that Bing’s people thought that the annual deficit for the city for Fiscal Year 2013 was just $47 million when the actual deficit is more than twice that, and for FY 2014 is estimated to approach $200 million. It’s no wonder that Michigan Governor Rick Snyder declared a financial emergency and appointed bankruptcy attorney Kevyn Orr to take over from the city council in March.

The task facing Orr is horrifying. Faced with more than $18 billion in debts and just $68 million in the bank, Orr started off the meeting by announcing that the city would not make a $40 million payment due that day on a $2.5 billion certificate of participation (COP). He announced further that the city wouldn't be making $104 million in pension contributions that are currently due either. In addition, retirees hoping that the city would be providing them with healthcare and full payouts of their pension benefits also received the bad news: They too would be forced to rely on the state’s insurance exchanges to obtain health coverage under ObamaCare or Medicare, and could expect significant reductions in their retirement checks as well, approaching $800 a month in many cases. 

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Photo of Detroit skyline: AP Images

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