UPDATE 2-Detroit manager's hope: a clean balance sheet in 14 months
DETROIT, Aug 7 (Reuters) - Detroit's emergency manager voiced confidence on Wednesday that the city could emerge from bankruptcy before his term expires in October 2014 and possibly without having to borrow more money.
Even so, Kevyn Orr, the bankruptcy expert who was appointed in March to a post that gives him almost unlimited power over Detroit's finances, warned that the path back to financial health will not be painless for Detroit's creditors.
If the city wins court approval to proceed with the Chapter 9 bankruptcy filing it made last month, virtually all of the city's creditors will have payments on their bonds reduced, he said.
"We may need a little bit of cash, or we may be able to stay cash-flow free-and-clear without borrowing anything for the purposes of the bankruptcy," Orr told Reuters in a wide-ranging interview. "The schedule we're on, we should be able to get this done in 14 months, so I don't anticipate a need for me to stay on."
Detroit's bankruptcy has marked a new low for a city formerly renowned as the cradle of the U.S. auto industry and central to America's role as the "arsenal of democracy" in World War Two.
The city's population has fallen from its peak of 1.8 million people in 1950 to around 700,000 as manufacturing jobs moved elsewhere along with the white population. Financial mismanagement and political corruption have made things worse.
The bankruptcy process is expected to be protracted and rough on creditors, who have been offered pennies on the dollar for the city's $18.5 billion in long-term debt.
Orr said he anticipates "a lot of jousting" between creditors in federal bankruptcy court but warned that he expects virtually all the city's creditors, even investors in the city's general obligation bonds, will have to accept reduced payments as part of the bankruptcy process.
"Most unsecured debt in bankruptcy gets a haircut," Orr said. "That's just what happens."
General obligation bonds, which are backed by tax revenue, have long been considered the safest class of municipal debt.
Michigan Governor Rick Snyder, a Republican, appointed Orr as emergency manager in March to tackle Detroit's financial crisis. In mid-July Snyder approved Orr's request to file for a Chapter 9 municipal bankruptcy.
Orr said his team of lawyers and advisers is seeking to make it through a grueling schedule in federal bankruptcy court at a pace viewed as aggressive by most outsiders. It would leave Orr little time to focus on corrupt practices in the city's past or on whether its borrowing was properly handled over the years. "I'm a draft horse with blinders on going uphill," he said.
The emergency manager said he did not anticipate any form of bailout from the state of Michigan during the bankruptcy process but thinks there will be "a lot of state support upon exit (from bankruptcy), and I expect I'll probably recommend to the governor and the state that there be some additional legislative oversight."
U.S. Bankruptcy Judge Steven Rhodes is to rule on whether Detroit is eligible for Chapter 9 protection in a trial to begin on Oct. 23. Orr expressed confidence the bankruptcy filing would be approved.
Rhodes has ruled that the federal bankruptcy proceeding overrides challenges from retirees and pension funds to Michigan's emergency manager law that started in state court.
Orr said he believes he has legal arguments to overcome any effort to use state law to prevent the bankruptcy from going ahead.
He said talks with Detroit's neighboring counties over the creation of a regional water and sewage authority were progressing well, with the suburbs keen on playing a role in the new authority. He ran through a long list of possible assets the city could sell, including its airport and parking meters.
The city said on Monday that it had hired Christie's auction house to appraise the city-owned portion of the Detroit Institute of Art's 60,000-piece collection, a move Orr said was mostly to determine what exactly the collection contains. He left open the option of selling off some of the DIA's works.
"Whether you have to sell grandma's heirloom china and your wedding silver is a big issue," Orr said. Detroit "shouldn't have to sell that stuff, but it's not a resolved issue by any measure."
Orr also addressed one of the biggest concerns: what will happen to pension benefits for Detroit's public employees. The city's retirees outnumber the active workforce by more than two to one.
"There are assets in both pension funds," he said. "So there's going to be pensions. The question becomes how do you divvy that up."
Orr said current retirees in particular could argue they should receive more than younger workers who have decades left in their careers.
"The guy or gal who's 35, they have a chance to go to defined contribution, get another job, get a second-job supplement, get married, handle their affairs," he said. "Frankly there's some validity to that kind of argument."
'ZERO' POLITICAL ASPIRATIONS
If Detroit is found eligible for bankruptcy, the case will generate immense interest since there have been relatively few municipal bankruptcies over the past eight decades and none on the scale of Detroit's. When asked if he was concerned about the precedents Detroit might set, Orr said: "I'm a fiduciary for this city. I cannot be concerned about what dreams may come from the result of what we do."
The emergency manager acknowledged that his mission was not a popular one. Orr's appointment has rendered the city's elected council largely powerless and critics have described him as a dictator.
"I think a lot of Detroit residents will be very happy to see me go," he said. Still, he is not concerned for his safety. "I've been hung in effigy in several venues in my lifetime."
Detroit held a primary on Tuesday that selected two mayoral candidates who will square off in a general election in November. Whoever wins is likely to take over once Orr leaves. He said both candidates for mayor seem to love the city and want to move forward.
"I hopefully will leave them with a clean balance sheet - the first time in a long time for the city - (and) a more agile city government," he said.
Asked whether he had had any political aspirations himself before being appointed or based on his experiences in Detroit since March, Orr said: "Zero. And after this, negative zero."