ROMULUS, Mich. (AP) — A team led by a state-appointed emergency manager said Friday that Detroit is defaulting on about $2.5 billion in unsecured debt and is asking creditors to take about 10 cents on the dollar of what the city owes them.
Kevyn Orr spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors in a move to avoid what bankruptcy experts have said would be the largest municipal bankruptcy in U.S. history.
Underfunded pension claims likely would get less than the 10 cents on the dollar.
To cut post-employment health care benefits obligations, Orr is proposing a $27 million to $40 million health care replacement program that will partially rely on Medicare and federal Patient Protection and Affordable Care Act (PPACA) programs.
More than 42 percent of Detroit’s 2013 revenues went to required bond, pension, health care and other payments. If the city continues operating the way it had before Orr arrived, those costs would take up nearly 65 percent of city spending by 2017, Orr’s team said.
An assessment of the plan’s progress will come in the next 30 days or so.
Orr also announced that Detroit stopped paying on its unsecured debt Friday to “conserve cash” for police, fire and other services in the city of 700,000 people. The debt not being paid includes $39 million owed to a certificate of participation.
“We will not pay that today,” Orr told reporters after the meeting with creditors at a hotel at Detroit Metropolitan Airport in Romulus.
The team said the proposal presented Friday is the one shot to permanently fix fiscal problems that have made the city insolvent.
Orr said everyone involved needs to come to grips with Detroit’s dire financial situation that has been worsened by years of procrastination and denial. He said his team is prepared for potential lawsuits from creditors not pleased with the arrangements under the plan.
“If people are sincere and look at this data, you would think a rational person will step back and say, ‘This is not normal … but what choice do we have?’” Orr said.
The city’s budget deficit could top $380 million by July 1. Orr believes Detroit’s long-term debt is more than $17 billion.
”The average Detroiter has to understand this is a culmination of years and years of kicking the can down the road,” Orr said. “We can’t borrow any more money. We started borrowing from our own pension funds.”
The Washington-based bankruptcy attorney hired by Michigan in March reiterated that the chances of bankruptcy are 50-50 for Detroit, the largest U.S. city placed under state oversight.
Orr is nearly three months into the 18-month job. With little time remaining on his contract, there is no time to lose. The plan creditors received in the closed-door meeting may be the only one they get.
Swallowing the proposal will be tough, especially for current and retired city workers whose health care and other benefits, as well as pensions, would be cut back.
“The firefighters are going to do what we can to keep the city stable now,” Detroit Fire Fighters Association President Dan McNamara told reporters after Friday’s meeting with Orr.
McNamara said creditors were told by Orr that “we’re in a death spiral.”
On Friday, Moody’s Investors Service downgraded a number of Detroit bonds, including its general obligation unlimited bonds. As a result, all Detroit bonds are now below investment grade.
Hetty Chang, a vice president with Moody’s, said “the emergency manager’s proposal to creditors indicates further debt restructuring.”
“We also believe the city’s risk of bankruptcy has increased over the last six months,” she said in a statement.