Detroit financial woes caused in part by Riverboat gambling with derivatives.....

http://www.zerohedge.com/news/2013-06-18/derivative-losses-bad-bets-and-aggressive-assumptions-leave-detroits-pensions-massiv

( Similar to Jefferson County , Detroit hosed by Banksters ..... one shouldn't make derivative bets you don't understand... )

Derivative Losses, Bad Bets, And Aggressive Assumptions Leave Detroit's Pensions Massively Underfunded

Submitted by Tyler Durden on 06/18/2013 09:52 -0400

• Creditors
 
• Detroit

Late last week, Detroit's emergency manager Kevyn Orr, outlined his plan to stop a disaster becoming a catastrophe in the slumping city. The initial suspension of payment on pension obligation bonds is just the start as Orr warns unsecured creditors may only receive up to 10 cents on the dollar as about $2.5 billion in general unsecured debt won't be recovered. Rather incredibly, the city's General and Police and Fire retirement systems have a combined underfunding of $3.5 billion made worse by"aggressive actuarial assumptions," and "investing in risky development projects around the city and loans that will never be repaid." Under more realistic assumptions the funding status of the two pensions drops from 83% and 100% to 65% and 78% and he notes that "if these pension funds' assets had just been invested in a conservative way," as opposed to the political and reach-for-yield driven extravagance, "they probably would be fully funded now." The bottom line is not just creditor haircuts but,"significant cuts in accrued, vested pension amounts for both active and currently retired persons."

Via Pensions and Investments Online,

...

Unsecured creditors may only receive up to 10 cents on the dollar under Mr. Orr's plan; his team said about $2.5 billion in general unsecured debt won't be recovered.

Detroit's liabilities total $17 billion, including $1.4 billion related to COPs and an additional $344 million in marked-to-market swaps related to the COPs, according to Mr. Orr's creditor plan.

...

Mr. Orr's pension fund analysis found that previous “aggressive actuarial assumptions” resulted in “substantially understated” funded status for each city pension plan. The funded status of the General Retirement System was 83%, while that of the police and fire fund was 100%, according to June 30, 2011, independent valuations.

Recalculations based on “more reasonable assumptions”substantially lowered the funded status of the General Retirement System to 65%, and the police and fire system to 78%, according to Mr. Orr's creditor plan.

...

“Because the amounts realized on the underfunding claims (the COPs and swaps unsecured debt) will be substantially less than the underfunding amount, there must be significant cuts in accrued, vested pension amounts for both active and currently retired persons,” the creditor proposal said.

...

“As discussed in the creditors' meeting today, if these pension funds' assets had just been invested in a conservative way, instead of investing in risky development projects around the city and loans that will never be repaid, they probably would be fully funded now,”

http://www.freep.com/article/20130618/NEWS01/306180113/Kevyn-Orr-creditors-Detroit-bankruptcy

Detroit Emergency Manager Kevyn Orr hopes to announce an agreement with some of the city’s creditors within the next couple weeks. The deal is one of several Orr must strike in order to avoid a municipal bankruptcy filing.

“We are hopeful that we’ll be able to announce a settlement with one category of creditors within the next week or two,” Orr told the Free Press on Friday after he delivered a key report to Detroit’s creditors that laid out his plan to settle the insolvent city’s liabilities of up to $20 billion.

Orr did not name the category of creditor, and his spokesman would not provide specifics Tuesday. Detroit owes money to various types of creditors including secured creditors — those backed by municipal revenue streams or other collateral — and unsecured creditors.

The expected deal would be an example of how quickly Orr wants negotiations with the city’s creditors to proceed, yet it is not a signal that a bankruptcy filing for Detroit is more or less likely.

Orr must reach agreements with all the city’s creditors to avoid bankruptcy. If that doesn’t happen, any deals reached beforehand would remain intact while outstanding debts are resolved through the bankruptcy process.

Orr has sent the message to creditors that reaching an agreement sooner would be in their best interest.

“It doesn’t get better with time,” he said Friday. “It actually gets worse. So the sooner you come in, the better treatment you might get because there’s a value to you coming in and giving us greater access to our revenue.”

The restructuring plan Orr unveiled in a closed-door meeting Friday with creditors will be the basis for any out-of-court agreements. Unsecured creditors could be paid pennies on the dollar for the debts they are owed and holders of secured debt will continue to receive payments because their debt is secured by collateral. The plan also includes a 10-year, $1.25-billion spending plan to deliver improved services to Detroit residents.

On Thursday, Orr is to meet with union officials to discuss the restructuring plan, which would reduce city-provided health care for retirees and current workers and other cuts to labor costs.

The meeting is at 10 a.m. at the Coleman A. Young Municipal Center. The meeting is closed to the public and “video devices, phone cameras or other recording devices” are not allowed, according to a letter the Jones Day law firm — the city’s restructuring counsel — sent to union officials. Recording devices also were banned from last week’s meeting with creditors.

Ed McNeil, special assistant to the president of American Federation of State, County and Municipal Employees Council 25, said he is not optimistic about engaging in sincere negotiations with Orr. .

McNeil, who attended Orr’s meeting last week at the Westin at Metro Airport, predicted that Thursday’s meeting will not include honest dialogue.

“They call you in, they tell you what they want you to hear and then the meeting’s over,” he said.