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Detroit Files for Chapter 9 Bankruptcy; Cash Flow at Negative $198.5M

 DETROIT — (Mealey’s) The City of Detroit late on July 18 filed for Chapter 9 bankruptcy in the U.S. Bankruptcy Court for the Eastern District of Michigan as its emergency manager declared that the city is insolvent and that, absent restructuring, he projects cash flows of negative $198.5 million in the current fiscal year, with that number likely to jump to negative $260.4 million in fiscal year 2015 (In Re:  City of Detroit, No. 13-53846, Chapter 9, E.D .Mich. Bkcy.).

The city appointed Kevyn Orr as its emergency manager in March. Orr says that Detroit requires “substantial investment” to allow it to provide basic services to residents, to attract new residents and businesses to foster growth and redevelopment and, ultimately, to begin a long recovery.

Financial Obligations

However, the city’s current financial obligations prevent that recovery, Orr says, because the city has more than $18 billion in accrued obligations; $11.9 billion in unsecured obligations to lenders and retirees; and more than $6.4 billion in obligations backed by enterprise revenues.

Currently, more than 38 cents of every tax dollar that the city collects goes to service legacy debt and other obligations rather than to provide services for the city’s residents and business, Orr adds.

Moreover, the city has not been paying its debts as they come due, Orr says. The city has deferred payment of pension funding contributions to both its General Retirement System (GRS) and the Police and Fire Retirement System (PFRS), and it accrues those deferrals at a rate of 8 percent. As of June 30, Detroit had deferred $108 million in contributions to the pension systems, Orr says.

Economic Crisis

In light of the growing economic crisis, Detroit has attempted various measures that would mitigate the situation, Orr says. The city entered into a consent agreement with the State of Michigan that resulted in the creation of a financial advisory board to oversee the city’s operations. Furthermore, the city reduced the number of city employees by more than 22 percent since fiscal year 2010 and has implemented revised city employment terms (CET) for both union and nonunion employees, Orr adds.

Detroit increased certain tax and utility rates, enhanced collection initiatives and reduced other expenditures, but despite achieving more than $200 million in annual savings from those measures, Orr says the city could not balance its budget or improve its cash position.

Negotiation Unsuccessful

Consequently, Orr says that because he was unable to negotiate an out-of-court resolution to the city’s financial emergency while simultaneously laying the foundation for a strong and prosperous city in the future, he recommended to Michigan Gov. Rick Snyder that Detroit file for bankruptcy.

Orr says that the Bankruptcy Court should direct the U.S. trustee to appoint an Official Committee of Retired Employees because the city’s post-employment obligations “are a crushing burden on the city’s financial well being and a restructuring of these obligations is a critical component of the city’s rehabilitation.”

The city is represented by David Gilbert Heiman of Cleveland.

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