Detroit emergency manager: We're flat broke and can't borrow any more

In other words, Kevyn Orr has reached the same conclusion as just about everyone else, outside of Detroit’s entrenched bureaucracy and political establishment.  In a report to be delivered to Michigan’s Treasurer today, the city’s emergency manager offers a “sobering wake-up call” that declares Motor City “insolvent,” with no ability to borrow further to meet its obligations.  Orr’s plan to turn Detroit around will require everyone to suffer the consequences, from bondholders to public employees:


Emergency Manager Kevyn Orr says the city of Detroit’s cash-flow crisis makes it “insolvent” and unable to borrow more money to mask over debts being made worse by skipping millions in payments for retiree pensions and health care.

After 45 days on the job, Orr’s initial assessment of Detroit’s perilous finances is laid bare in a 41-page report to be delivered today to state Treasurer Andy Dillon.

Calling it “a sobering wake-up call about the dire financial straits the city of Detroit faces,” Orr said he will use the report as a baseline for paring down the city’s $15.6 billion in debt and long-term liabilities. …

The emergency manager’s spokesman put the city’s predicament in more blunt terms. “We’re going to be out of money by the end of the year,” Nowling said Sunday. “If all we did was collect taxes and pay our debt, we couldn’t pay it off in 20 years. That’s the situation that we’re in now.”

And just how does Orr propose to do that?  Bondholders will get a haircut first, but then the city’s bloated public-sector liabilities will end up in the crosshairs:

Debt service on $1.8 billion in Pension Obligation Certificates and related swaps the city owes is expected to escalate over the next decade, with the principal alone more than doubling from $23.1 million this year to $56 million in 2023, according to Orr’s report.

Interest on the pension-related debt will be $83.8 million of the city’s $139.9 million in debt interest this year. … Retiree health care benefits aren’t constitutionally protected and could be wiped out by the emergency manager, Bernstein said.


That’s not the only area of the public sector Orr will target, either:

Orr described the city’s operations as “dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption.”

“Outdated policies, work practices, procedures and systems must be improved consistent with best practices of 21st century government,” he said in the report. “A well run city will promote cost savings and better customer service and will encourage private investment and a return of residents.” …

It’s highly likely he will seek concessions from the city’s labor unions. At least five unions representing police and firefighters are seeking arbitration in collective bargaining with the city.

Detroit lacks, but is developing a “comprehensive labor strategy for managing” its relationships with its unions, according to Orr.

Unions are definitely lacking their usual leverage, for two reasons.  First, Orr is not an elected official but an appointed manager, which means he’s not susceptible to the usual inducements to provide a sympathetic posture to the PEUs.  Second, the law that created Orr’s position allows him to unilaterally terminate union contracts and force renegotiation from scratch, and Orr has already stated he’s willing to use that power:

The emergency manager law gives Orr the authority to “reject, modify or terminate” collective bargaining agreements and concessions will be sought, he wrote in the report.

“This power will be exercised, if necessary or desirable, with the knowledge and understanding that many city employees already have absorbed wage and benefit reductions,” he wrote.


There’s also a third problem for unions, which is the new right-to-work law in Michigan.  That forces them to collect their own dues rather than have the state collect them out of the paycheck directly.  They won’t have the usual power of forcibly-collected cash to fight Orr, and the descent of Detroit won’t make them terribly sympathetic to Michigan voters, either.

Can Orr save Detroit? Expect to hear a lot of requests for federal bailout cash if he doesn’t.

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