Expert: Detroit officials must embrace debt plan

Robert Snell
The Detroit News

Detroit — An expert helped Detroit clear a major hurdle in its path out of bankruptcy Wednesday by endorsing the city's debt-cutting plan, but warned that elected officials need to be on board for the plan to work.

Martha Kopacz, the bankruptcy judge's handpicked expert, testified near the end of the city's bankruptcy trial that Detroit's $7 billion debt-cutting plan is feasible. But she cautioned city officials and Detroit's bankruptcy team have not spent enough time — until recently — restructuring city operations.

She also issued a dire warning about the city's pension system, which was battered by the Great Recession and plagued by corruption, mismanagement and poor investments. Pension obligations need to be monitored closely if Detroit successfully emerges from bankruptcy, she said.

"They could wake up with a bad nightmare, not unlike what they've been through with this pension system to get to this point," Kopacz said.

U.S. Bankruptcy Judge Steven Rhodes engaged his expert in a prolonged question-and-answer session as the judge probed for holes in her analysis of the city's debt-cutting plan.

The judge quizzed Kopacz about the financial impact of various settlements Detroit has reached with creditors to drop objections to the debt-cutting plan.

The settlements have pushed Detroit to the "skinny end of feasibility," she testified.

She also criticized the speed with which U.S. Bankruptcy Judge Steven Rhodes has taken Detroit through the biggest municipal bankruptcy filing in U.S. history. Detroit filed bankruptcy in July 2013 with more than $18 billion in debt and could emerge next month.

Speed "is a two-edged sword," Kopacz testified. "In a little over a year, the city has gone through a massive restructuring process and will have significantly (slashed debt)."

The city plans to invest $1.7 billion in services, including money for public safety, computer systems and to fight blight.

"Everybody in the city needs to get on the same page relative to what the plan is post-bankruptcy," Kopacz testified. "Right now, the official budget doesn't include anticipated spending that is really, really critical."

The criticisms were new. Kopacz's conclusion that Detroit's debt-cutting plan is feasible, however, was first revealed in July so it was not a surprise during testimony Wednesday.

Feasibility is one major test that municipalities must pass in order to successfully emerge from bankruptcy protection.

Kopacz, of Philadelphia-based Phoenix Management Services, was brought in to assess the feasibility of the city's debt-cutting plan as well as its financial projections and assumptions.

She concluded that the plan was feasible, but stressed the city needs a larger and better-trained workforce and commitment from its elected leadership to carry out the massive restructuring.

Closing statements in the trial are set to begin on Monday.

The judge said he intends to deliver a decision in open court during the week of Nov. 3 on whether he will confirm the city's plan.

If Rhodes rules that Detroit's debt-cutting plan is fair and feasible, it will allow the city to dump $7 billion in debt and invest $1.7 billion into restructuring and reinvestment initiatives over the next decade.

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