CHICAGO - It's a strategy facing unresolved legal obstacles that must be carried out by a poorly equipped, undertrained workforce.
But the plan of adjustment Detroit proposed to emerge from its historic Chapter 9 bankruptcy is feasible, the independent municipal finance expert hired by the federal bankruptcy court believes.
The success of the plan is hardly a lead-pipe cinch; it faces challenges that include unresolved legal, debt and financing issues.
But "it is likely that the city of Detroit, after the confirmation of the Plan of Adjustment, will be able to sustainably provide basic municipal services to the citizens of Detroit and to meet the obligations contemplated in the Plan without the significant probability of a default,"
Kopacz, a senior managing director at the firm, cautioned that factors that could impact the city's condition post-bankruptcy are "unknown and unknowable" and could have a "material impact" on the feasibility conclusions.
Kopacz was charged with assessing whether the assumptions that underlie the city's cash-flow projections and forecasts are reasonable and whether its overall plan to deal with its $18 billion debt load and exit its one-year-old Chapter 9 is feasible.
Bankruptcy Judge Steven Rhodes cleared release of the 226-page report to creditors and other participants in the historic Chapter 9 case on Friday but it was not immediately made public. It was obtained by The Bond Buyer Monday.
Rhodes chose Kopacz to review the city's proposed plan of adjustment in April. The report's release comes ahead of the bankruptcy court trial on the city's confirmation plan, slated to begin August 14.
Kopacz's did not reach her conclusions without critique, suggestions for improvements, and warnings.
The plan assumes an exit financing will support city investment and liquidity needs. The projections assume a $300 million facility with an 11-year term, funded on October 31, 2014, with interest only payments in the first four years and equal principal payments made in years five through 11. The interest rate is assumed to be 6%.
The city's investment bank advisor Miller Buckfire & Co. believes the city can achieve those terms, but Kopacz cautions that "in the event that this financing is unavailable to the city on reasonable terms, is significantly lower in terms of facility amount, or is otherwise different than the assumptions in the [plan of adjustment], it is unlikely the city will have sufficient liquidity to operate and satisfy its obligations."
Litigation is ongoing after the city sued to invalidate nearly $1.5 billion of pension certificates of participation issued in 2005 and 2006, arguing they were illegal from the start.
"To the degree that such legal proceedings result in the COP claims being fully or partially allowed, the City's [plan of adjustment] could be materially weakened, and may result in incremental liquidity being required from future tax revenue to satisfy future obligations," the report says.
Litigation tied to swaps associated with the COPs, involving the city's ability to access casino tax revenues pledged to swap counterparties and the city's right to have entered into a settlement with the counterparties, is before the Sixth Circuit Court of Appeals. The swap insurers challenged both.
"To the degree the insurers' appeal is successful, any clarity of the city's financial exposure to a potential swap termination payment would be lost and would possibly result in the future restricted access to some portion of the vital Casino revenues," the report warns.
The city's bankruptcy team has focused on finance at the expense of operations, Kopacz wrote.
"I believe the speed of this proceeding has negatively impacted the level of feasibility of the plan of adjustment," she wrote. "This bankruptcy has been largely focused on deleveraging the city, often to the exclusion of fixing the city's broken operations."
Kopacz called the projections in Detroit's disclosure plan "convoluted." The plan lays out 10- and 40-year forecasts based on proposed restructuring and reinvestment initiatives. She suggested that the sooner the city "divorce" itself from the confusion created by the plan's projections the better.
Future aid levels over the long term also could pose a challenge.
The plan's success and a proposed $1.7 billion in reinvestment initiatives also relies on political cooperation, which received a positive review so far.
The report raised concerns over the city workforce's ability to carry out all pieces of the restructuring plan and took the city's poor computer technology system to task. Kopacz recommended that the nine-member financial review commission that will take over fiscal oversight of the city after the emergency manager's term ends hire a full-time staff, given the time commitment.
The team reached its conclusion on the plan's feasibility after more than 200 interviews with people involved in city management, the bankruptcy, and the plan of adjustment, and the review of hundreds of documents and models, independent research and analysis.
The report noted that "by most accounts, there is forward progress being made" on the administrative front with the team finding that the combined efforts of Emergency Manager Kevyn Orr and Mayor Mike Duggan "are addressing service shortfalls."
The standard Kopacz and her team used in determining the plan's feasibility was based on the question: "Is it likely that the city of Detroit, after the confirmation of the Plan of Adjustment, will be able to sustainably provide basic municipal services to the citizens of Detroit and to meet the obligations contemplated in the plan without the significant probability of a default?"
The report concludes that the projections are generally mathematically correct and materially reasonable and "therefore fall within the feasibility standard" as defined by the team.
The report further finds that the individual assumptions used to build the projections fall into a reasonable range and when taken collectively are "also reasonable and fall within the feasibility standard."
Kopacz, whose team conducted more than 200 interviews, underscores in the report the lack of case law in determining a plan's "feasibility." Her team sought to understand the framework and methodology used to prepare the plan through interviews with key personnel and financial advisors, by reviewing the data used to develop forecasts, and independently verifying assumptions.
The team reviewed cost cutting initiatives, capital plans, revenue receipts, interest rate variations, cash flow forecasts, and contingency plans. The team also assessed execution risks by examining the available financial and human "capital."
The focus of the feasibility study centered on city operations funded by the general fund, with only enterprise funds that impact the general fund evaluated.
Kopacz suggests that the city is at a "tipping point," despite the risks it faces.
"It is beginning to feel like it could be an exciting time to be in Detroit," she writes, warning that momentum could turn against the city if investors flee or blight remediation reverses direction. "It is a critical point in time for the City of Detroit. My opinion is that it is more likely to tip forward than to tip backwards."
Kopacz said her billing rate of $595 per hour, and the billing rates of her colleagues which range from $100 per hour to $550 per hour, were lowered by 10%.
