Better in their words…

What a mess. I’m sure George Bush is mostly to blame. Is anyone surprised that most liberal newspapers do not put too much time into this story. Might be inconvenient…

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By MATTHEW DOLAN, KELLY NOLAN and EMILY GLAZER

DETROIT—The city of Detroit told some debtholders on Friday they will have to accept pennies on the dollar or risk getting drawn into the largest U.S. municipal bankruptcy ever.

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Kevyn Orr, the bankruptcy lawyer hired by Michigan Gov. Rick Snyder to lead the restructuring of Detroit’s troubled finances, told representatives of the city’s creditors that the city plans to stop making payments on some of its debts, starting with a $39.7 million payment that was due Friday, and won’t make payments in the foreseeable future on at least $2 billion in unsecured municipal debt as part of a move to save cash.

The total bill for the city’s long-term liabilities is nearly $20 billion, and the city is now insolvent, according to Mr. Orr. His decision to suspend debt payments could serve as a trigger for Chapter 9 bankruptcy filing in a matter of months, and the plan for the city of about 700,000 that he unveiled on Friday could serve as a road map under bankruptcy.

Over the next 30 days, Mr. Orr plans to negotiate with dozens of bondholders, insurers, unions and pension funds. If enough of those groups balk at the plan, they could help force a Chapter 9 bankruptcy. It is still possible—but increasingly unlikely, say people familiar with the matter—that a negotiated settlement can be reached outside of bankruptcy court.

At most risk is the $11 billion in unsecured debt. That includes almost $6 billion primarily in health benefits for retired city workers; more than $3 billion for retirees’ pensions; and about $530 million in general-obligation bonds. Retirees are set to get less than 10% of what is owed them under the plan.

Other debt is considered secured, including about $5.3 billion in bonds backed by revenue from the city’s water and sewerage department. City employees and vendors would continue to be paid.

Mr. Orr’s proposal also calls for using the savings from the cuts to invest $1.25 billion in public safety and blight removal to revive a city beset by a dwindling tax base, entrenched crime and population loss.

Mr. Orr also is reviewing the sale of the city’s assets but has made no final decision. His examination of the worth of the city’s Detroit Institute of Arts created a furor in the city, but it was still unclear what the museum’s fate will be.

Tamara Lowin, director of research at Belle Haven Investments, whose firm owns some of the city’s debt insured by Assured Guaranty, said she was surprised at Mr. Orr’s treatment of some “unlimited tax general-obligation bonds” as unsecured debt. She said these types of bonds are viewed as one of the safest investments in the municipal-bond market, because by law, there is a dedicated stream of tax revenues attached to them, with the pledge that the local government must raise revenues as much as necessary to repay the debt.

Matt Fabian, managing director of research firm Municipal Market Advisors, said the borrowing costs of other local governments in Michigan could rise as a result of the treatment of these bonds as unsecured. About 80% of Detroit’s $8 billion in water and sewer, pension and general obligation debt is insured, according to the firm’s research.

State and local officials have long worried about the spillover effects of a Detroit bankruptcy. But Republican Gov. Rick Snyder, who has the final say on any filing, has recently softened his opposition, saying it could be a viable option with appropriate planning.

“The plan Kevyn discussed with creditors today requires shared sacrifice among all involved, but most importantly focuses on a restructuring designed to return Detroit to solid financial footing, ensure the delivery of essential services for residents and solidify the city’s viability well into the future,” Gov. Snyder said in a statement.

On Friday, Mr. Orr said again that he would prefer not to file for bankruptcy, but added that it remained a workable option for the city.

As Detroit inches towards bankruptcy, the world-class art collection at the Detroit Institute of Arts could be sold off to pay creditors. Is it the right move? Can it be averted? Douglas Bernstein, Plunkett Cooney managing partner, joins the News Hub. Photo: Getty Images.

Mr. Orr’s proposal calls for unsecured bondholders carrying about $2.5 billion in debt to take the largest “haircut,” receiving less than 10 cents on the dollar.

Secured creditors would fare best, but new bonds would be issued to cover the debt and could include changes to the terms.

Mr. Orr’s team is also in negotiations with surrounding suburban counties to lease its city-owned regional water system to them in exchange for new revenue for Detroit.

Mr. Orr’s plan seeks to supplement the slashed retiree health-care benefits by enrolling retirees under the Affordable Care Act or through Medicare. He plans to meet with unions directly on Thursday to discuss his proposed changes.

Union leaders expressed disappointment with the plan, saying workers and retirees were taking too big a hit. Ed McNeil, assistant to American Federation of State, County and Municipal Employees Council 25 president, representing the city’s largest union for municipal workers, said bondholders needed to take a larger cut since workers had already been hurt by cuts to wages and furlough days. Daniel McNamara, president of the Detroit Fire Fighters Association, said it would be difficult to get all of the 48 unions to agree to such concessions.

One of the goals of the plan is to try to improve city services, which remain subpar despite one of the state’s highest levels of taxation. Mr. Orr’s team called the city’s current path a “death spiral” because of the increasing percentage of the city’s budget in coming years that will be devoted to paying retiree benefits.

During Mr. Orr’s presentation on Friday, his cellphone started ringing and some people in the room began to murmur, wondering why he was allowed to have his phone on and they were not.

“Those rules don’t apply to me,” Mr. Orr joked, according to people who attended the meeting and his spokesman.

Write to Matthew Dolan at matthew.dolan@wsj.com, Kelly Nolan at kelly.nolan@dowjones.com and Emily Glazer at emily.glazer@wsj.com

A version of this article appeared June 15, 2013, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Pennies or Bankruptcy, Detroit Tells Creditors.

Detroit Looks to Pay Less to Bondholders – WSJ.com.