CHICAGO — Detroit is being cautious, even pessimistic, about its revenue expectations and its ability to enter the capital markets over the next decade, according to bankruptcy documents filed Friday.
The city's 10-year recovery and investment plan, included in the filing, also shows a $1.5 billion capital investment plan, up from the $1.25 billion plan the city unveiled last June, a month ahead of its historic bankruptcy filing.
Detroit filed the highly anticipated plan of debt adjustment and disclosure statement in bankruptcy court Friday. The documents give the first comprehensive look at how the long-struggling city plans to not only repay its creditors but also how it plans to rebuild after it emerges from Chapter 9.
Tax projections over the next 10 years are relatively conservative, eschewing the city's past practices of overly optimistic revenue expectations.
"We're being prudent about our financial projections," Orr said Friday in a conference call with reporters.
The projections show income taxes rising to $267 million in 2023 from $246 million in 2014 due to improved employment and wage inflation.
State revenue sharing is expected to increase to $198 million in 2023 from $191 million in 2014. The projections, which were crafted with the help of the Michigan Department of Treasury, are expected to rise in part due to the state's anticipation of higher tax revenue collections and distributions.
The casino tax, the city's third largest revenue stream, is expected to decline, due largely to competition from nearby casinos, mostly in Ohio. Casino revenues are expected to drop by 5%, to 168.5 million, by 2015, and not begin to recover until 2023. The tax generated $170 million in 2014.
Sales taxes and property taxes are both also expected to decline over the next 10 years, with modest property tax revenue increases starting in 2021. The property tax decline is expected largely due to cuts in assessed values.
The city plans to continue to collect revenue from a property tax levy that was originally approved by voters solely for the repayment of unlimited-tax general obligation bonds. The city is treating those bonds as unsecured, and is the midst of litigation with the bond insurers who wrap the debt.
In a section on risk factors, the city notes that it's possible it might not be able to continue to collect the ULTGO levy in the future. If the bankruptcy court approves the city's treatment of the GOs as unsecured, and the plan is confirmed, the bondholders may sue, the city said in the plan. If the city loses access to the money, it plans to borrow to cover the lost revenue.
The ULTGO millage generated $66.5 million in 2014 and the city expects to collect $34 million from it in 2023. In total it expects to collect $533 million from the millage over the next 10 years, according to the plan.
"In the event the city is precluded form levying these taxes, it anticipates borrowing funds sufficient to replace this lost revenue. In that event, there can be no assurance that the city will be successful in obtaining the financing," Detroit said in the plan.
Utility user fees will also decline, mostly because $12.5 million of that tax stream is now dedicated to the newly created Public Lighting Authority, which took over the city's lighting department last year.
The city still hopes to secure a debtor-in-possession financing within the next several weeks that may be around $200 million. Detroit has signed an agreement with Barclays for a loan, but the deal stalled last month. The casino revenues that are to be pledged to the Barclays' loan, are tied up in negotiations with the interest-rate swap counterparties.
If it secures the DIP, the city wants to refinance it quickly with a $300 million post-bankruptcy financing. That financing would generate $118 million of proceeds in fiscal 2014 and $175 million in 2015, according to the plan.
The loan is tentatively structured as an eight-year note, starting in October 2014 — the city's target date for exiting bankruptcy. The financing would feature interest-only payments for the first four years and equal principal payments in years five through eight, according to the plan.
The disclosure statement also notes as a risk the possibly of limited market access in the future as the city attempts to secure financing to pay off creditors by issuing new securities, and generate proceeds for its capital plan.
"Holders of the new securities may encounter limited market acceptance of city credit upon any attempt to sell city debt obligations, making sales at or near par potentially difficult," the plan said. "Holders of city debt after the effective date may not be able to sell such debt for any price for some time. Alternatively, potential purchasers may demand discounts to the par amount of obligations before a potential purchaser would be willing to purchase city debt of any kind. There can be no assurance that a secondary market will exist for any City debt."
The $1.5 billion 10-year capital plan would launched with a $20 million per month expenditure using the proceeds from the DIP loan.
Spending on technology investments is now expected to total $148 million, up by $65 million originally presented to creditors. Spending on general restructuring initiatives now totals $868 million, up by $72 million.
The capital plan is crucial to the city's survival, Detroit argues in its plan.
"The absence of this reinvestment deprives the city both of badly needed short-term relief and the opportunity to lay the foundation for long-term prosperity, ensuring inadequate provision of municipal services to the city's residents for the foreseeable future," it argues.