'Whether we are eligible' for bankruptcy 'or not, the city has got to get out from under the swaps,' Bill Nowling, Emergency Manager Kevyn Orr's spokesman, said in an interview. (David Coates / The Detroit News)
Detroit’s harrowing financial situation is real, experts testified Thursday in the eligibility phase of the city’s historic bankruptcy case, despite repeated objections from union lawyers.
And it won’t get much better if a deal to raise $350 million in debtor-in-possession financing — unanimously rejected by a skeptical City Council vowing to offer an alternative as early as today — doesn’t get done to replenish the city’s meager cash flow.
The proposed transaction with Barclays PLC, a London-based multinational lender, would use $230 million of the financing to terminate interest rate obligations on pension debt, or “swaps,” owed to UBS and Bank of America Merrill Lynch. The remaining $120 million would be invested in city operations, combined with another $120 million in casino revenue released once the swaps are eliminated.
Complicated? Yes. But the package, not easy to secure for the largest city in American history to file Chapter 9, is vital to operating the city during bankruptcy and making progress on Emergency Manager Kevyn Orr’s goal to improve services for long-suffering residents.
“Whether we are eligible” for bankruptcy “or not, the city has got to get out from under the swaps,” Orr’s spokesman, Bill Nowling, said in an interview. “If this bollixes up the deal, this completely blows out the cash-flow projections for the city. These actions have consequences that are very real for the viability of the city.”
Consequences or not, the proposal hits the usual hot buttons of Detroit politics, almost all of which guarantee vigorous push-back: It would pay “the banks” before other creditors; it would pay them more; it would be “risky,” as one council member put it, as if a bankrupt Detroit with miserable credit ratings and an abysmal record of financial management has many options.
It doesn’t. If not for Kwame Kilpatrick’s savvy $1.44 billion pension obligation certificates deal and the swap morass it created, Orr wouldn’t be pushing a deal to unwind the swaps and raise cash. And the city might not have been forced to seek protection in Chapter 9 bankruptcy.
“The city was operating on a razor’s edge,” Kenneth Buckfire, co-founder of the investment banking firm Miller Buckfire & Co. and head of the city’s restructuring team, testified before U.S. Bankruptcy Judge Steven Rhodes. “I knew we had a continuing problem with the swap banks.” The city “was continuing to stretch out payments wherever possible to preserve cash.”
Last May, he said, Ernst & Young LLP produced a 12-month cash-flow projection “that indicated to me that the city’s cash-flow projection was worse than it anticipated,” a prospect that increased the likelihood the swaps could trigger a third default by the city if its treasury failed to pay.
“The city had no more cash,” Buckfire said. “It was erratic,” chiefly because Detroit’s most consistent source of revenue — casino taxes — was imperiled by the onerous swap agreements. “At any moment it could run out of cash.”
In multiple instances Thursday, lawyers representing the city’s public-sector unions and its pension funds objected to questions of city consultants asking how they reached their assessments of the city’s cash-flow shortfalls and under-funded pension funds.
The goal? Presumably to show the central contention of Detroit’s claimed insolvency and pension liabilities are merely a matter of opinion, that Orr and his team did not and never intended to bargain in good faith, that the city refused to explore other ways to raise cash — even though it has and is, witness the Christie’s Auction House appraisal of the Detroit Institute of Arts’ most valued works.
Never mind that a concerted effort to sell the Detroit Water and Sewerage Department to interested private equity investors, as Buckfire confirmed in testimony, would have elicited a firestorm of criticism from Detroiters, the city’s political class and suburban customers alike. Imagine Wall Street vultures sinking their talons into a Detroit “jewel,” a precursor to raising rates significantly for 4 million customers.
Never mind that forcing liquidation of a portion of the DIA’s city-owned collection as part of a pre-bankruptcy restructuring would have alienated donors and peer institutions, gutted the DIA’s tri-county funding model, invited another massive legal battle and accelerated the closure of one of the state’s most valuable cultural touchstones.
Never mind that the city’s other widely touted “assets” — Coleman A. Young Airport, Joe Louis Arena, a random assortment of publicly owned art, vehicles, smaller parks and parcels — would net comparatively little compared to the nearly $12 billion in various kinds of debt owed to creditors, including pensioners.
By this logic, Orr and his team apparently should have bargained with themselves, the citizenry, elected officials and predatory investors, to name just a few potential partners, as a precondition to demonstrating the right to seek protection in Chapter 9.
It doesn’t work that way, unless the goal is destroying the city and its future to save it for a relative few.
Daniel Howes’ column runs Tuesday, Thursday and Friday.