The city of Detroit has been in a financial mess for some time now, one the eve of bankruptcy the Governor of Michigan, appointed a lawyer to fix the mess. Detroit owes it’s creditors $15 billion dollars. In an attempt to sort out the mess Orr, has said the city would default on some of it’s debt, and will pay back just ten cent’s per dollar.
Detroit is the biggest of a number of cities that have gone bankrupt due to poor decisions made during the height of the housing crisis. Taking the lead as the biggest city in the U.S. to go bankrupt Detroit beats Jefferson County, Alabama, which had defaulted on $4 billion in debt.
Detroit’s basic problem is it’s continued decline in population, the city can’t raise enough revenue to fund the cities obligations. The cities obligations require some 67% of revenue through 2017. The city is practically insolvent.
Orr has planned to us a mix of things free up $1.5 billion in the next decade which would come by juggling expenses, and cuts to health and pension plans. Orr stated that the city has a shortfall of $3.5 billion in pension obligations. Orr plans to ask union’s to take less pay in the future as the pension funds are still pretty well funded.
In 2006 the city faced a $1.5 billion shortfall in pension liabilities, in which is sold Certificates of Participation, selling the certificates through a legally separate financial vehicle, at a floating interest rate. The City then entered into a swap with UBS that converted the certificates into fixed rates.
European Banks accumulated most of the $1.5 billion in certificates, these banks have been severely weekend by the continents financial problems. Having lost so much already it’s unclear if these banks will write off any of the cities debts, or if they will make the city continue to pay on it’s $1.5 billion in debt.