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Detroit rock bottom: City announces $2.5bn debt default

Published time: June 15, 2013 16:03
The abandoned and decaying Packard Motor Car Manufacturing plant, built in 1907 and designed by Albert Kahn, is seen near downtown Detroit (Reuters/Rebecca Cook)

The abandoned and decaying Packard Motor Car Manufacturing plant, built in 1907 and designed by Albert Kahn, is seen near downtown Detroit (Reuters/Rebecca Cook)

Detroit said it will stop making payment on $2.5 billion of the city’s massive $18.5 billion debt and has asked creditors to accept 10 cents in the dollar of what the city owes them in a bid to avoid the largest municipal bankruptcy filing in US history.

Detroit Emergency Manager Kevyn Orr said the city would stop making payments on its unsecured debt in a bid to “conserve cash” for vital services like police and firefighters. He further said pension benefits both present and future along with healthcare would face cuts, while control over the city’s water and sewage would be turned over to an independent body.

“We’re tapped out," Orr was quoted by WWJ-TV as saying. "We need to come up with a plan to restructure our debt obligations and our legacy obligations going forward — that is: pension, other employee benefits, healthcare, so on and so forth."

Orr continued that $1.25 billion would be set aside over the next decade, $750 million of which will go towards public safety, including funds for police, fire, streetlights and other endeavors. The remaining $500 million will be for blight removal.

The emergency manager spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors holding Detroit debt on Friday in an effort to fix fiscal problems which have left the city insolvent.

One bond holder present at the meeting who asked not to be identified told Reuters Orr’s proposal was likely more than debt holders would be able to accept.

"It's just too much. It is an unprecedented amount to ask."

If creditors reject the plan, Detroit could be forced into what would be by far the largest-ever municipal bankruptcy in US history.

Orr said there is a “50:50” chance the city will be forced into bankruptcy and that decision would likely happen in the next 30 days.

"Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin," Orr said.

In a report issued to creditors on Friday, Detroit’s skyrocketing debt, pension and healthcare obligations will sell to almost 65 percent of total city revenue by 2017, up from the current level of 42.5 percent.

Detroit has also experienced a 26 percent decline in population since 2000, while unemployment surged from 6.3 percent in June 2000 to 18.3 percent in June 2012, further shrinking the city’s revenue base. Meanwhile, the city’s budget deficit is likely to exceed $380 million by July 1.

Orr, who was appointed three months ago by Michigan Governor Rick Snyder to salvage the city’s finances and operations, has been met with skepticism by local residents who have accused him of exaggerating the current situation.

“We feel that the bankers and the creditors who are here today with the emergency manager are not going to negotiate in the best interest of the people of the city of Detroit. And we are saying that the same financial institutions that Mr. Orr is negotiating with today are responsible in large part for the crisis that exists in Detroit,” Abayomi Azikiwe, a protester outside the meeting told PBS.

Leaders of some of Detroit’s 48 public sector unions were also upset by the proposals, with water and sewage workers vowing to strike over the privatization plans.

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