Worse Than Thought
"If all we did was collect taxes and pay our debt, we still couldn't pay it off in 20 years. That's the situation we're in now."
So spoke Bill Nowling, spokesman for Detroit's emergency manager Kevyn Orr. In office for 45 days, Mr. Orr himself previewed, this past weekend, his initial assessment of Detroit's finances, with his full, blunt 41-page report being submitted to Michigan's Treasurer today. If anything, the financial state of the city is more dire than expected - Mr. Orr (a bankruptcy lawyer) avoided using the term "bankruptcy", but said the city is, on a cash flow basis, "insolvent", having "effectively exhausted its ability to borrow" following decades of relying on the issuance of long-term bonds to fund short-term operations. Despite Mayor Bing's expenditure cuts in 2012, the city's deficit for the first nine months of the current fiscal year is $326 million, compared with the previous estimate from the Detroit City Council of $100 million, and is on track to reach at least $456 million in the full fiscal year ending June 30, 2013. That's quite a miss. Total accumulated debt now totals $15.6 billion, about $1.5 billion above an earlier estimate, another big miss.
As serious as this is, there's more. The more pertains to Detroit's two city-employee pension funds, particularly, how well-funded, or otherwise, they are. In the somewhat arcane field of pension analysis, mathematical assumptions are typically used by actuaries to assess the value of funds. Detroit officials have been saying for some time that the Detroit General Retirement System, and the Police & Fire Retirement System, have been 83 and 100 per cent funded, respectively. This seemed to be one bright spot in the overall dismal finance picture. But Mr. Orr has had a look at the assumptions, especially the current value of assets. He's found them unrealistic - to such an extent, that he has ordered 56,000 pages of documents from both pension boards to enable his team to produce a truer picture. "Utilizing more current data and/or conservative assumptions could cause a funding deficiency to jump into the billions", Mr. Orr states in his report. And, added to this, there is the hugely unfunded retiree health care benefits system, which unlike the pension funds, is not constitutionally protected, and thus could be impacted (along with many other creditors) by a city bankruptcy.
Now that his initial assessment is submitted, Mr. Orr is on the offensive in media interviews today, stating that "anyone who thinks they can wait this out needs to think again". With Michigan Governor Snyder in full support, Detroit finally has in Mr. Orr an administrator who is set, and empowered. to at least stop the rot. In the remaining 16 months of his term, Mr. Orr will face entrenched interests, especially the public sector unions and bond holders, who can either agree to his view of a new order, or be listed as creditors in a bankruptcy filing.