Detroit Plan Feasible, Expert Tells Bankruptcy Judge

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Marti Kopacz, from Phoenix Management, on September 16th, 2011. (PHOTO BY NANCY L. FORD)

CHICAGO — The trial on Detroit's debt-adjustment plan adjourned Wednesday after a court-appointed finance expert testified that its plan to exit Chapter 9 bankruptcy is feasible.

Though the debt-adjustment  and reinvestment plan meets the criteria of being feasible, the post-bankrupt city could find itself "on the edge" when it comes to servicing debt and managing operations, finance expert Martha Kopacz, from Philadelphia-based Phoenix Management Services, testified.

U.S. Bankruptcy Judge Steven Rhodes hired Kopacz earlier this year as an expert witness to analyze the city's plan to shed $7 billion of debt and invest $1.7 billion in services and development.

Kopacz' testimony plays an important role in Rhodes' decision on whether the confirmation plan is feasible, a key benchmark to clear the Chapter 9 process.

Rhodes adjourned the trial until Oct. 27, when closing arguments will begin. Rhodes said he expects to rule on the plan the latter half of the week of Nov. 3.

Rhodes must also decide whether the plan treats creditors fairly and was crafted in good faith, which Kopacz did not consider in her analysis.

Kopacz concluded that the city will likely be able to provide basic services and meet its obligations "without significant probability of default," according to local reports from the courtroom.

But the city could be on a tightrope.

"I do believe we are on the edge of what the city can reasonably be expected to be able to service in the future," said Kopacz, referring to its debt obligations.

Detroit plans to borrow $275 million from Barclays in an exit financing to pay off creditors and improve services. An inability to do the Barclays deal "could have caused the plan to tip into infeasibility," Kopacz said.

"The debt is a means to an end, and based on the projections the city can service that," she added.

When questioned by Rhodes about a projected 6.75% return rate for the city's two pension funds, Kopacz said the assumption rate was reasonable, but added she would "make it 5% if I ruled the world."

She warned that without careful monitoring, the city could find itself facing mounting pension debt again.

"They could wake up with a bad nightmare, not unlike what they've been through with this pension system to get to this point," she told Rhodes.

City officials also need to put more effort into its restructuring initiatives, she said.

"There has not been, until recently, as much energy put into restructuring operations," she said. "It's not in the budget and there's not a robust implementation plan behind it."

The speed of the bankruptcy — Detroit is expected to emerge from the largest Chapter 9 filing in history in little more than a year — has been a "two-edged sword," Kopacz told Rhodes, who has pushed to maintain the ambitious timeline.

On the positive side, the city has shed nearly $7 billion of debt and undertaken a massive restructuring, she said.

"But because the focus has been on the bankruptcy and the speed in getting that done, there has not been until recently as much energy put into restructuring the operations of the city," she said. "Functionally, the city operationally was broke.

"I believe the emergency manager had to pick one of two options," she said. "The focus was on delivering, not fixing, the operations. That was one way the speed cut against necessary, long-term things which will now have to be accomplished outside of the bankruptcy which could be more difficult to achieve than inside the bankruptcy with the power of the emergency manager."

A longer process might also have allowed creditors to gain a deeper understanding of the city's finances and allow Detroit to craft wider, multi-party agreements, she said.

"I think we would have been able to reach settlements where maybe we weren't as close on that continuum of feasibility as we are today," Kopacz said.

The revenue projections that underpin the city's revitalization plan — which some have warned are unrealistic — are largely reasonable, according to Kopacz. An annual growth rate of 2% for income taxes may even be conservative, she said. State revenue aid is expected to stay flat, while casino tax revenues are projected to decrease, at least in the near term.

She also named the low amount of funding set aside for contingencies as a "continuing concern," but added that it didn't make the plan infeasible.

The creation of a fiscal review committee that will oversee the city's finances for up to 20 years will play a key role in the plan's feasibility, she said. "The existence of the financial review commission, the oversight commission, I think is a very positive, qualitative factor in ensuring that the city conducts itself in such a way that ensures or helps to ensure the commitments of the plan are going to be met," she said.

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