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Originally published May 13, 2013 at 5:46 AM | Page modified May 13, 2013 at 3:24 PM

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Detroit is broke; could bankruptcy lie ahead?

The first report by Detroit's emergency manager declares that the city is broke and at risk of running completely out of money - a financial meltdown that could mean employees don't get paid, retirees lose their pensions and residents endure even deeper cuts in municipal services.

Associated Press

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DETROIT —

The first report by Detroit's emergency manager declares that the city is broke and at risk of running completely out of money - a financial meltdown that could mean employees don't get paid, retirees lose their pensions and residents endure even deeper cuts in municipal services.

If Detroit cannot avert disaster by reducing its debt payments, the only remaining option appears to be bankruptcy, a threat that looms large over Kevyn Orr's urgent efforts to make deals with creditors and debt holders. Orr says he will have to seek concessions from those groups to keep the Motor City afloat.

"On a cash-flow basis, we don't have it. We're broke," Orr said Monday at a news conference. He said the city can make payroll through the rest of the year, but that some other bills and obligations are not being paid or are being deferred.

"We can't continue to do what we've been doing," he said. "It's probably a little worse than I expected. It's severe. I mean it's dire."

In March 2012, Detroit borrowed $80 million from Bank of America to avoid running out of money. But the outlook has not improved in the last year.

Orr's "first attention has got to be turned to making sure he has enough money to pay the bills he has coming in," said James McTevia, president of McTevia and Associates, a Detroit-area turnaround firm. "If I'm a creditor getting paid for my current goods and services, I'm going to be more apt to work out on something I'm owed."

Orr, a Washington-based turnaround expert and bankruptcy attorney, was selected by Gov. Rick Snyder to oversee Detroit's finances. In his report, Orr described the city's operations as "dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption."

"Outdated policies, work practices, procedures and systems must be improved consistent with best practices of 21st century government," Orr wrote. "A well-run city will promote cost savings and better customer service and will encourage private investment and a return of residents."

Detroit's net cash position - the amount of money in the bank after bills are paid - was a negative $162 million as of April 26. The budget deficit that a few months ago was believed to be about $327 million could reach $386 million before July 1.

The city also owes more than $400 million, including $124 million for public improvement projects. Its long-term debt tops $14 billion.

Orr avoids using the word "bankruptcy" in the 41-page report to the state treasurer and said Monday that he believes it won't be necessary. He expects to have a clearer picture about the path ahead in six to eight weeks.

"I think we can avoid bankruptcy if people move forward in good faith," Orr said. "It's going to be hard. I don't expect anybody to say OK. I expect there to be some give and take. If we can't, we have to look at everything."

Snyder agreed that bankruptcy wasn't inevitable.

"There's a whole process you go through, and the process includes trying to work with people to not have that happen," the governor said.

City officials in Stockton, Calif., sought Chapter 9 bankruptcy protection after tentative agreements with some of the city's unions failed to provide enough financial relief. The community was still unable to pay its bills or make payroll, and City Manager Bob Deis said further cuts required court intervention.

"Bankruptcy is not a desirable option unless it's the absolute last option you have," Deis said. "Bankruptcy is not the disease. Bankruptcy is the chemotherapy for the disease."

Bankruptcy protection allowed Stockton to wipe out $8 million to $9 million in annual retiree health care costs and freeze $13 million in yearly debt payments for later renegotiation.

Orr may choose to go before a bankruptcy judge "when he gets his back against the wall and he can't meet payroll," McTevia said.

"He can default on payments to pension funds. He will try to sit down and negotiate with the pension funds: `We can do this out of court or we can do this in court.' The same thing with bond holders. It will take years for Detroit to ever pay its bonds, and they need to be negotiated," McTevia said.

The bulk of the city's revenue comes from property and business taxes. But Detroit's population dropped by 250,000 between 2000 and 2010. And outside of downtown and a few other areas, business growth virtually is nil.

"My gut feeling is that taxes are going to have to be raised at some time," possibly a temporary surcharge on businesses to keep the city afloat, McTevia added.

A Chapter 9 bankruptcy filing would also mean even more spending cuts, according to Wayne State Law School professor Peter Henning.

Bing says his administration has cut about $350 million in wages and benefits. Dozens of jobs have been cut or left unfilled.

"Services never improve after a bankruptcy," Henning said. "I read through Orr's report. The emphasis is really on the cost-cutting and the restructuring. Rarely does that improve services in the short run. In the short run, city services are going to suffer."

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Associated Press Writer Tom Krisher in Warren, Mich., contributed to this report.

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