Detroit can survive after bankruptcy but large risks loom: expert

Reuters News
Posted: Oct 22, 2014 1:47 PM

By Karen Pierog

DETROIT (Reuters) - Detroit's relatively fast move through municipal bankruptcy has resulted in costly creditor settlements and too little emphasis on fixing the city's broken operations, a restructuring expert testified in U.S. Bankruptcy Court on Wednesday.

Still, Martha Kopacz, who was appointed by Judge Steven Rhodes to assess the viability of Detroit’s plan to restructure $18 billion of debt and obligations, concluded the plan is feasible and that its underlying revenue and other assumptions are reasonable.

"It’s likely that the city of Detroit after confirmation of the plan of adjustment is able to sustainably provide basic services to the city without a significant probability of default,” she testified.

She gave the plan a passing grade, saying problems could emerge from the city council’s budget, low training of staff, pension funding and other issues.

Kopacz, a senior managing director at Phoenix Management in Boston, also said that the money the city will borrow to help it exit the largest-ever municipal bankruptcy and begin rebuilding “will enable the city to resolve its bad borrowing procedures and bad financial decisions of the past.”

“The debt is a means to an end,” she said, and then added a note of caution. “I believe we are on the edge of what the city could reasonably service in the future.”

Detroit, which filed for bankruptcy in July 2013, is on track to leave court much sooner than other recent municipal bankruptcies if Rhodes determines the city's plan is fair to creditors and feasible to implement. The judge has said he will announce his ruling late in the first week of November.

Kopacz said the fast pace of the bankruptcy process helped turn the focus of Detroit and its creditors to the city’s balance sheet and away from its operations. Also, the pace may have contributed to better recoveries for creditors through mediation, she said, noting the cost of the settlements "has pushed the plan to the skinny end of feasibility."

Court-ordered mediation resulted in settlements with all of Detroit's major creditors, including city retirees and pension funds. That deal involves the so-called Grand Bargain, which creates a pool of money from foundations, the Detroit Institute of Arts and the state of Michigan to ease pension cuts and protect city art work from being sold to pay creditors.

Kopacz said the plan fixes the amount the city must pay for its pensions over the next 10 years.

“The concern that I have is if the city doesn’t monitor the obligation that is going to be there in 2023 and beyond, they could wake up to a bad nightmare not unlike what they have at this point.”

She also told Rhodes that the city must integrate the plan into the city budget and have a score card to keep track of restructuring and reinvestment initiatives.

Kopacz, who testified for more than two hours, said projections for Detroit’s income, property and casino taxes, as well as revenue-sharing from the state of Michigan, face some risks but are reasonable.

On Monday, Detroit will wrap up the confirmation hearing that began on Sept. 2 with closing arguments from its attorneys and those representing other proponents of the plan.

(Additional reporting by Peter Suciu in Detroit and Lisa Lambert in Washington; editing by Matthew Lewis)