The consensus seems to be that Detroit Emergency Manager Kevyn Orr’s bankruptcy-extrication plan will need to undergo significant changes before it is formally approved by Judge Steven Rhodes. In fact, most observers agree that the plan would fail to achieve its stated goal of putting Detroit back on sound fiscal footing, and could further destabilize the city’s finances. Certainly, it has failed to inspire financial markets with the necessary confidence to produce essential investment down the road.
There are several flaws contained within Orr’s plan, and a few glaring omissions. Perhaps most striking, though, is the proposal to pay literally nickels – 3 of them – on the dollar to Detroit’s bondholders. Offensive and dispiriting to the bondholders, one imagines. More importantly, at least to anyone who has an interest in seeing Detroit flourish once again, it is depressingly shortsighted.
Having witnessed the shoddy treatment here, who would feel secure investing in the city’s future? How does dishonoring today’s creditors instill confidence in tomorrow’s prospective lenders?
The only viable long-term plan for Detroit rests heavily on faith. A faith that Detroit has turned the proverbial page on its profligate past, is eager to become a First World City, and is now poised to engage in some adult-type accounting.
The kind of accounting that says you may only spend what you have, and nothing more.
The kind of accounting that allows you only to acquire debt obligations that are commensurate with your long-term ability to satisfy them.
The kind of accounting that dictates you pay your creditors. Always. On time, in full.
The kind of accounting that conforms to the basic principle that you won’t attract investment unless you do all of the above, and offer a healthy return and a safe nook for those dollars.
So many of Detroit’s current heavy burdens – at least $18 billion of them – are the product of an attitude of ignorance of or hostility towards these foundational accounting precepts. It is no longer 1978 — or even 2004. Wiser minds are in control. That’s what we were promised when Orr was appointed.
Governor Snyder should pay attention. There will be no Detroit renaissance without a well-mollified investor class to whom the city can turn for an infusion of cash. Sticking the state finger in the creditors’ eye won’t get them there. The road to recovery will not be paved with disgruntled lenders, and city and state authorities will fail to recognize this truth at their peril. Does anyone believe the creditors won’t rightly seek their days in court? And, beyond the many expensive lawyers involved, who else would be served, exactly?
Equally dispiriting are the twin Orr decisions, first to decline to spin off the Detroit Water and Sewerage Department – worth an estimated $1.9 billion over 40 years – and second, to rubber-stamp the “art for pensions” deal that would fail to maximize the value of the city’s assets for the benefit of creditors and citizens, and instead would favor the short-term gain of retirees in Florida or Arizona.
Detroit’s art collection is a legal and undisputed city asset, worth a staggering sum (estimates vary, but the range has consistently been in the neighborhood of $10 to $20 billion.) It’s an asset that either absolves the city’s outstanding debts entirely, or, simply augments the existing asset pool sufficient to do so.
Either way, Detroit’s art represents one of the most readily identifiable, immediately accessible, and easily monetized sources of value for the city. A token sale of a small portion of the collection at an artificially low value, as outlined in the Orr plan, would rob the city of an important tool for resolving its problems. Seriously, how can this even be contemplated?
Kevyn Orr has an important and achievable mandate: outline a bankruptcy exit strategy that deals fairly with creditors, restructures the city’s finances, maximizes available assets, and takes the sober long view about attracting investment and safeguarding a self-sustaining future for the once-great city. Let’s hope he rises to the challenge.