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Detroit may take years before fully functioning as a city

Mayor Mike Duggan says city is about 10 per cent of where it needs to be and warns a full recovery from bankruptcy is a multi-year process.

Motor City is bankrupt, carrying $18 billion US in debt and cost of bankruptcy has risen by $50M

Detroit Mayor Mike Duggan said the city would be able to carry out $1.7 billion worth of rebuilding initiatives as well as continue daily operations called for in the plan of adjustment crafted by the city's state-appointed emergency manager, Kevyn Orr. (AP Photo/Carlos Osorio, File)

Detroit may take years before fully functioning as a city, its mayor said on Monday as he gave a tepid blessing to the plan for ending the city's historic bankruptcy.

Mayor Mike Duggan was the last witness called by Detroit's attorneys, who then rested the city's case in a U.S. Bankruptcy Court hearing on the plan to adjust $18 billion (all figures US) of debt.

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"We're about 10 per cent where we need to be," Duggan said about Detroit's current state. "It's going to be a multi-year process."

Duggan also expressed qualms over the financing for exiting the largest-ever municipal bankruptcy — a $325 million loan from Barclays Capital intended to pay partly for creditor settlements, consultant fees, operations and the "restructuring and reinvestment initiatives" in the plan.

The mayor said Detroit would be able to carry out $1.7 billion worth of rebuilding initiatives as well as continue daily operations called for in the plan of adjustment crafted by the city's state-appointed emergency manager, Kevyn Orr.

"I support this plan and I believe it is feasible," he told Judge Steven Rhodes, who is overseeing the case.

But he cautioned that the plan could be affected by future events.

"I can't predict a national recession. I can't predict state-revenue sharing cuts. I can't predict different casinos being approved," Duggan added.

Rhodes must decide two issues: if the plan for adjusting the debt and obligations is fair to creditors and if the city can follow it. With all but one major creditor — Financial Guaranty Insurance Company — having settled with the city, much of the focus has turned to whether the city will be able to afford the spending the plan requires, and if the projections used in it are reasonable.

Duggan said he began a lengthy review of the 1,111-page plan after he learned he would have to testify on its feasibility, having each city department analyze it. In the end he said he was "pretty convinced" the plan could be carried out.

The plan projects Detroit receiving $200 million annually in revenue sharing from the state of Michigan, but Duggan noted the state has cut funds for local governments in the past. Meanwhile, he said, the city's three casinos could face increased competition from new Native American casinos in Michigan.

Duggan also said the plan's expectation of 2-per-cent annual income-tax revenue increases can happen only if the city's population grows.

But the mayor, who worked previously on the troubled finances of the Detroit Medical Center, held the deepest reservations about exit financing and appeared shocked when Rhodes said the loan was $325 million.

Duggan said that while more money was authorized for borrowing, the city would take out only $275 million. After Rhodes insisted the total draw-down was $325 million, Duggan said there had been a $50 million overrun in bankruptcy consultants' fees.

"I believe we need to keep the exit financing to the lowest possible amount," Duggan said. "I would be very disturbed if we had to borrow an extra $50 million because the consultant fees did not stick to budget."

Rhodes said he understood that the higher amount was intended to pay for a settlement with limited-tax general obligation bondholders. Even then, Duggan said the borrowing should be "as low as we can."

Duggan told the Detroit Free Press after leaving the witness stand that the overall cost for Detroit's bankruptcy consultants recently grew to $180 million from $130 million. According to a document from Orr's office, the amounts paid and outstanding for consultants' bills as of Oct. 3 were $137.2 million.

When Rhodes asked about using the collection of the Detroit Institute of Arts as collateral for a loan, which FGIC is suggesting in order to pay creditors richer recoveries, Duggan said: "I am not a fan of borrowing at all. It's a big part of how we got here."

The hearing began on Sept. 2. With the city's case for the plan's confirmation completed, the hearing now turns to testimony from witnesses for opposing creditors.

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