As most of us know, actions have consequences. The potentates of Detroit have ignored the inevitable consequences of their fiscal and moral profligacy for over forty years. Now the rest of us will pay the bill in one way another, whether through state and federal bailouts or through higher municipal and state borrowing costs. The architects of the disaster will pay no price, rather, most will collect lucrative pensions.
Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default . . .
“It definitely sets a precedent, and there’s definitely going to be a penalty going forward for the city and the state,” said Dan Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey. The company oversees $19.5 billion of local debt.
DETROIT (WWJ) – . . . Detroit Emergency Manager Kevyn Orr . . . sat down in a closed-door meeting with about 150 creditors, bond holders and unions to discuss the city’s fiscal situation, seeking concessions that would save Detroit millions of dollars in payments.
Perhaps the most dramatic aspect of his plan: Orr said, starting now, there will be a moratorium on debt payments for all unsecured funded debt. Creditors are being asked to take about 10 cents on the dollar of what’s owed them. Underfunded pension claims would get less.
This latest comes as Detroit continues to spend more money than it takes in as revenue. The city’s budget deficit could top $380 million by July 1, and Orr now estimates the city’s long-term debt at $20 billion.
As part of the proposal, Orr said he wants to invest $1.25 billion in the city for police and fire; and $500 million to fight blight.
“We’re tapped out,” Orr said.
“Mayor Bing said he thinks it would make sense pass a law that mandates that new employees of the city [Detroit] remain residents of the city of a period of seven years.
“In seven years a lot of things can change. And I’m hopeful in seven years we’ll see the city change and people will want to come back to the city,” he said.”
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.
The report hints that city employees who were not hit by last year’s wage reductions could face pay cuts in the near future and that Wall Street bondholders will be asked to take a haircut to relieve a city that shelled out $133 million in debt payments last year on a $1.23 billion budget.
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.”
From The Detroit News
CBS News, interviewing Detroit Emergency Manager Kevyn Orr:
“I’ve been spending virtually every day from March 25 when I got here, looking at the city’s financials. This is an emergency. I’ve got 16 and three-quarters months to deal with it,” he said. “This is truly a financial emergency and we need to move with speed because frankly, we can’t be here in the same position next year.”
In the report, Orr uses charts and graphs to paint the bleak picture of the city’s finances, including over $15 billion in long-term debt and an accumulated operating deficit of $325 million.
“We’ve been collecting operating deficits at about $18 million to $20 million a year. That’s nobody’s fault, I think, frankly, the mayor and the council has done the best they can with what they have.”