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 Detroit is far short of the $1.7 billion it needs over the next 10
years to remove abandoned buildings, replace outdated technology and
increase public safety to stem the exodus from the city. The city
will be hard pressed to get its daily operations onto a stronger
footing and has few clear ways to raise all the needed revenue,
critics say.
“What Detroit needed to start with was a reinvestment program,” said
James Spiotto, managing director of Chapman Strategic Advisors, a
municipal finance consultancy. “If you don’t solve the systemic
problem and fix it for real, all you’re going to do is repeat it
going forward.”
Detroit’s 1,034-page plan for fixing the city’s finances will be the
subject of a weeks-long bankruptcy court proceeding, beginning on
Tuesday.
Detroit filed the largest-ever municipal bankruptcy in July 2013,
with $18 billion of debt. Critics, including a court-appointed
bankruptcy expert, are raising questions about whether Detroit has
reduced its debts aggressively enough, and even city officials
acknowledge Detroit faces significant challenges, with little room
for error.
Federal bankruptcy Judge Steven Rhodes ultimately will rule on
whether the financial restructuring proposed by Kevyn Orr, Detroit’s
state-appointed emergency manager, is realistic.
City officials are beginning to see glimmers of hope in the form of
business investment, a downtown housing boomlet, and major
investment from Quicken Loans founder Dan Gilbert, who has snapped
up dozens of downtown buildings.
SHORT OF CASH
The $1.7 billion over the next decade is meant to address some of
the city’s most vexing challenges. The biggest chunk, $558.7
million, would go to public safety, while an upgrade of the city’s
decrepit information systems would eat up the second-largest piece,
$479.9 million.
But it is not clear how the city will get the money. So far, the
biggest chunk for Detroit's restructuring initiative is coming from
$300 million in federal grants. JPMorgan Chase & Co announced a $100
million, five-year commitment in May to help spur bankrupt Detroit's
economic recovery that includes $25 million to address blight.
There is no cash in a bank account to fund the initiatives,
court-appointed expert Martha Kopacz wrote in her report that gave
Detroit’s plan a tepid endorsement for feasibility.
The state of Michigan has committed $195 million toward the $661
million “Grand Bargain” designed to protect the Detroit Institute of
Arts collection, but all of that money is earmarked to ease city
retiree pension cuts, and will not be directed toward the $1.7
billion of restructuring initiatives.
Even if funds are found, the city in some cases has downplayed the
size of its problems. For example, the $420 million allocated for
blight removal is less than half the $850 million called for by the
city-backed Blight Removal Task Force.
 On one key area of reform, pensions, the city has frozen accrual of
pension benefits and restructured them going forward. But Kopacz has
noted that the assumed rate of return on its pension investments —
6.75 percent — is below the national average for public pension
funds and could tempt the city toward volatile and risky
investments.
Even when Detroit has arranged funding to meet its needs, it has not
met its original objectives. Exit financing announced last week,
$275 million in new borrowings from Barclays Capital, came in $25
million lower than city officials had forecast.
Figure in the fact that most of the proceeds will go toward paying
off an existing loan and fund certain creditor settlements, and
Detroit will have little free cash from the loan to cover operating
costs as the city exits bankruptcy.
Confidence in the plan is weak in part because figures put forward
by Orr often do not match Detroit’s own budget figures.
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“The feasibility reports don’t even make a real attempt to make them
convincing,” said William Brandt, a Chicago-based turnaround expert
whom Rhodes interviewed for the expert’s job.
Brandt called the plan “a treatise in equivocation.” JUDGE COULD
REJECT PLAN
John Hill, Detroit’s chief financial officer, acknowledged the city
is dealing with significant uncertainties.
Judge Rhodes could reject the plan.
Detroit could lose in its controversial effort to invalidate over
$1.4 billion of certificates of participation (COPs) the city sold
in 2005 and 2006 to pay its pension liability.
The restructuring initiatives are budgeted to bring in $483 million
in new revenue and save the city $358 million over the next decade.
To make it happen, though, Detroit will need access to debt
financing to fund the upfront costs of investment, Hill said.
Mayor Mike Duggan, who will be responsible for Detroit’s fiscal
health after emergency manager Orr’s term expires later this month,
is moving ahead regardless of the uncertainties.
Inside the Coleman A. Young Civic Center, Hill and other city
officials are scrambling to rebuild Detroit’s balance sheet, restock
city departments with new personnel and redesign Detroit’s
information infrastructure.
“Moving out on all these things at the same time makes it
difficult,” Hill said.
Hill is putting controls in place to help the city stay within
budget: Placing representatives from the CFO’s office into city
departments to help control costs, for example. A new grants
management office will scout for federal and foundation cash. By
streamlining hiring procedures, the city aims for a significant
reduction from the six months it currently takes to hire an
employee.
In the area of information infrastructure, Detroit’s historic
under-investment is proving an unanticipated benefit. “There’s not a
system worth saving,” Hill said. “I look at it as an opportunity.”
After years of troubling headlines, conditions are beginning to
improve say entrepreneurs like Zak Pashak, who founded Detroit
Bikes, which is hand building bicycles on Detroit’s west side.
“On the ground, bankruptcy is not as dramatic as it might seem from
a distance,” said Pashak, who pointed to improvements in city
services and the local business climate. “It’s nice to see the
situation addressed. It’s not dire. It’s actually really positive.”
(Reporting by David Greising in Detroit, Karen Pierog in Chicago and
Tim Reid in Los Angeles; Additional reporting by Megan Davies in New
York; Editing by Lisa Shumaker)
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