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Gambling revenue at heart of Detroit's dilemmas, new and old

The skyline of the city of Detroit from up high, sunset.
(Reuters) - For Detroit, the road in and out of U.S. bankruptcy court is paved with casino money.

An economic lifeline, wagering tax revenue from the city's three casinos is at the heart of the bankruptcy plan submitted by Emergency Manager Kevyn Orr, and it is behind the surprise rejection of a deal with banks last week that has thrown a wrench into Detroit's route and timing to recovery.

Moreover, some $330 million in assistance pledged by a coalition of philanthropic groups, including the Ford Foundation and the Kresge Foundation, will not begin flowing to Detroit until it exits bankruptcy, the head of one group told Reuters.

Michigan voters in 1996 approved casino gambling in Detroit, hoping to revitalize the ghost town. Three glitzy resorts eventually opened, helping to spark a burst of energy and bringing as much as $180 million in annual taxes.

But the funds have been tied up since 2009 by a separate, disastrous deal that Detroit is trying to reverse.

In an effort to reduce its unfunded pension liability, the city sold $1.45 billion of bonds in 2005 and 2006, then used derivatives known as swaps to cut risk. The derivatives deal backfired as interest rates dropped, when Detroit expected them to rise. When Detroit's credit rating was cut to junk in 2009, banks had the option to demand $400 million, and the city fended off immediate payment by pledging casino revenue as collateral.

The deal's continued threat to Detroit's financial future was one of the key elements that pushed the city into the largest municipal bankruptcy in U.S. history in July.

And now with an eye on exiting bankruptcy court, the city is seeking unfettered access to the casino funds to help improve city services - and finance a loan to terminate the derivatives deal.

"Every day that we don't have access to casino revenue, we cannot make the necessary investment in this city to provide for the health, safety and welfare of the citizens," Orr said in a deposition last August, shortly after bankruptcy was declared.

In late December, he negotiated a deal for the banks behind the derivatives deal to take a 43 percent reduction in value, only to have federal bankruptcy Judge Steven Rhodes last week reject the plan, saying the discount was not deep enough.

Orr had hoped to get Detroit out of bankruptcy by September 2014.

"Reports of the quick in and out of Chapter 9 for Detroit may be measurably exaggerated," said William Brandt, president and CEO of Development Specialists Inc, which deals with restructuring and public finance.

"NO WAY" WITHOUT CASINO MONEY

Casino taxes, Detroit's third biggest revenue source after municipal income taxes and state revenue sharing, have been described by Orr and his consultants as the city's most stable source of money.

"They've got to get the revenues. There's no way they can make the plan work without those revenues," said Laura Bartell, a Wayne State University law professor.

As Orr was preparing to take Detroit into bankruptcy last summer, he first negotiated a deal with the banks behind the swaps, Merrill Lynch Capital Services and UBS AG, that would help emancipate the city from the swaps deal at a 25 percent discount to the nearly $300 million estimated cost at the time.

As the bankruptcy proceedings got under way, under pressure from Rhodes, Merrill and UBS agreed to raise the discount to 43 percent, reducing Detroit's payment to $165 million plus up to $4.2 million in costs.

But last week Rhodes declared the concessions still were not enough. He called the payment "too high a price" and put the casino money at the center of debate by declaring that Detroit probably did not have a right to pledge that money as collateral in the first place under state law. He suggested Detroit might win in a bid to invalidate the swaps altogether if a court were to find the city had no right to pledge the casino money.

PAIN TO GO AROUND

One message from Rhodes' ruling is that all creditors have to lower their expectations, said Richard Ciccarone, president and CEO of Merritt Research Services, a provider of municipal bond credit information. "(The judge) wants everybody to feel the pain. Nobody is getting special treatment," he said.

James Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler, said Rhodes rejection of the deal may benefit Detroit in the long term.

"It will motivate people that the emergency manager is negotiating with to rethink their positions," he said.

Rhodes' ruling Thursday also introduced new questions about whether Detroit can count on casino money to fix its problems.

His comment from the bench that the original pledge of casino money for the swaps deal may have violated Michigan's gaming law raised questions about Detroit's new plan to get out of the derivatives mess: a loan secured with a pledge of the city's income and casino tax revenue.

Detroit had planned just such a loan, of $285 million, from Barclays, to pay off the swaps and provide funds for running the city as well.

When he rejected the plan to end the current derivatives deal, Judge Rhodes effectively swept aside that plan. He also emphasized that he would need to approve any new loan involving casino revenue, to make sure they are not misused.

(Editing by David Greising, Peter Henderson and Bernard Orr)

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r1elvis January 21 2014 at 5:06 PM

Detroit - the perfect example of liberal policies and what eventually happens to a tax and spend (DEMOCRAT) run government that bans guns, but hands out free entitlements to everyone.

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John Thunder January 21 2014 at 4:07 PM

Always questionable when a city government depends upon a casino to fund it's obligation to the
city tax payers for funds. Did'nt this happen to the State when they relied on the State Lottery to
fund the School System. A lot of that money ended up in the slush fund. Detroit would do better
by collecting all the property tax money it is owed first!

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dlyh626 January 21 2014 at 3:06 PM

who wants to go to a gambling casintoin Detroit and get robber, killed, bit by a rat, inhale pollution .... not me

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jmink123 January 21 2014 at 3:06 PM

The whole structure of that state and city government is dem. It has the largest welfare pay out of any of the states. all the so called racial or not political correct statements below are RIGHT. The dems and the Free handouts to illegals and lazy freeloaders needs to stop or WE WILL be a 3rd worlld nation and the man to do it is in the White House. ALL welfare recipitants need to have drug test and work for the state to get their checks. AMEN

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1 reply to jmink123's comment
rostra January 21 2014 at 4:09 PM

Spend some time doing the research, the largest users of entitlement programs are Conservative Southern and Mid West States, and vote GOP. Only one "Utah" pays more in taxes, than they receive in entitlement money. In addition, it was NAFTA that began the heavy downfall of Detroit. Guess who designed and enacted NAFTA, George Bush Seniors, along with Mexico, and Canada. Clinton compounded this errorneous Act by Ratifying it, and making it Law.

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2 replies to rostra's comment
xxxr8r12 January 21 2014 at 5:14 PM

rostra: I am a REGISTERED Democrat since 1977. You live in denial and refuse to see reality. Have you EVER looked at the lines at the welfare offices or ANY other gov't. handout facility??? If you had an ounce of honesty in your entire body, you would admit that jmink is 100% correct.

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TTigerLilyx2 January 21 2014 at 10:31 PM

Dont waste your time Rostra, the corporate puppeteers have recruited a whole new batch of sociopaths to get online and spew hatred with 'republicantz GOOD, Democrats BAD' bs.
Wont work, divide and conquer is being recognized as a simple diversionary tactic along with all their other red herring bs like abortion, gay marriage and legal pot.
Joke is on them, all the screaming got attention, all right, just not the attention they wanted.
Roe v Wade WILL be upheld, gay marriages is being legalized in State after State and whats THAT? Marijuana legalized for RECREATIONAL use?? Oh MY!
Repeal NAFTA and the Citizen United farce, bring back Glass-Steagall. Jail any Judges etc caught ruling in favor of money over Citizens rights, stop the TPP, move Homeland Security and half these other lame 'drug war' agencies into enforcing the EPA, force drillers, frackers, miners etc to carry enormous liability insurance policies and forbid foreign investments on National land. Stop the useless wars and pouring billions into 'dark' ops. Put all those billions into rebuilding this country before China decides to foreclose!!!!
And, yes, investigate and give serious hard time to any officials caught playing fast and loose with citizens money, from Social Security to Michigan's casino mess and places like Cali's towns paying its officials massive salaries, bankrupting the towns.

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jim January 21 2014 at 3:05 PM

It's unbelievable how crooked these politicians can be. They promise casino money then they try to take it back and now the crooked court system is going to help them steal the money from the banks. Fantastic leadership over there. Let's make their governor our next president,

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mvnup January 21 2014 at 2:55 PM

You see what a mess so many of these Cities are in due to political mismanagement and you wonder why they are making such a big deal out of a traffic jam that Christie MAY have had a part in. I say may because unless you believe the media you are innocent until proven guilty.

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dlyh626 January 21 2014 at 2:27 PM

Anything that can helpj

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gggaloha January 21 2014 at 2:27 PM

Detroit was a better run city in the 30's when being run my the Mafia

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yondan2 January 21 2014 at 2:03 PM

The former head of the commodites division (i believe) had begun to require so-called derivatives to the same requirements as other commodities.

A derivative is one bank's guaranty to another to insure it against loss in a(ny) paricular transaction. I.E. If the deal goes south, the insuring bank would take the hit.

But in the Wall Street meltdown, former Head of the Federal Reserve (read feudal kindom) Alan Green span testified to the effect that derivatives were not under the jurisdiction of the Commodities Bureau was not "reviewable " under the authority given the Commmodites Excahnge Commision. Also, thanks to the efforts of B. Frank, the standards for loans on residentilal loans, previously followed religiously by FNma and frdc, were catatrophically lowwered.

When a derivative insured bank had a "deal" (unreviewable allegedly) go south, the insuring bank coulod not pay, and, it appears that many derivatives themselves were insured under the same thiinking, so then Bank 3 was presented a bill (failureof a deal in the former Eastbloc) and it was fond it could not pay its obligation under the derivative contract.

So, Just as banks ordered more than they could eat under the GArn St. Germain act (like building, and owning developments and hotels and CREDIT UNION SERVICE ORGANIZATIONS
a cascade effect was triggered because of "derivatives" which could not have passed Federal Loan required scrutiny in a Milllion Years.

(crash noise here with the weeping and gnashin of teeth similar to that which followed the passing of bad commodities)

However this first malfunction was "bailed out by several banks" acting in conjunction to pay the insured debt.

Okay, the first one was covered, but then the roof caved in and "i don't know how many" derivitavely insured deals crashed.

Meltdown.

My own insight into matters siuch as these was at the Federal Credit Union level where the officers and selected Dirctors of a local CU had their attorney create an "equity sharing mortgage" which, de facto, could never be paid off.

Thjis made the attorney nervous enough to have a near psychotic break and he (me) was fired and replaced by the high school schoolmate he had hired.

54 suqsequent houses were flipped by the Trust using Shareholders money without shareholder knowledge or approval.

The CU became shaky. A NCUA investigator was called in. Either the auditor was not shown the "flips" (de facto unethical and ilegal) and the CU was let alone to "crash" a few years later.

jrt

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PaPa Joe January 21 2014 at 1:40 PM

Between the black and huge Muslim population they have turned it into a 3rd world country. You can scream racist or not PC, my answer is it's the truth.

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2 replies to PaPa Joe's comment
Dennis January 21 2014 at 1:47 PM

You are 100% correct. Next you have to get the blacks off welfare and somehow make it attractive for the whites to return to the city, or Detroit will NEVER prosper again.

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TTigerLilyx2 January 21 2014 at 10:58 PM

What I've read is the banks are giving VERY favorable foreclosure deals to their buddy investment companies, who will keep all that choice, cheap real estate off the market as they develop it into homes the middle class can never afford,much less the poorer, squeezing that many more into the ghettos being created as they go along.
So I guess the whites will come back. Just not the ones you expect.

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