By Joseph Lichterman
DETROIT (Reuters) - Detroit was operating on a "razor's edge" and had no options to avoid running out of cash and filing bankruptcy, the city's top adviser testified on Thursday in a trial to determine whether the city is eligible to file the largest municipal bankruptcy in U.S. history.
Kenneth Buckfire, the city's top outside financial adviser, said the city tried to avoid filing bankruptcy in July by cutting expenses and looking at city assets that might be sold to raise cash.
The case is being closely watched for the precedents it could set for other U.S. cities facing huge healthcare and pension obligations amid declining revenue.
Unions, pension funds and others who would face large financial losses if Detroit is granted bankruptcy protection are arguing that the city does not qualify and is rushing into bankruptcy as an effort to avoid meeting its financial obligations.
Buckfire, an investment banker hired by the city in January to advise on its financial restructuring, described in his testimony the city's search for cash in the weeks before the state-appointed emergency manager, Kevyn Orr, determined a bankruptcy filing was Detroit's best option.
Detroit's best source of revenue was its three casinos, which brought in about $180 million (111.1 million pounds) a year, or 20 percent of the city's budget, Buckfire testified.
But those funds have been locked up since they were pledged as collateral to interest-rate swap contracts agreed to in 2009. And the city now hopes to use them as collateral on $350 million of debtor in possession financing to end the unfavourable swap deals.
To raise cash, Detroit considered selling everything from masterpieces at the Detroit Institute of Arts to city infrastructure. But no deals could be closed before the July 18 bankruptcy filing, he said.
The city's Coleman Young Municipal Airport is "effectively worth nothing," Buckfire testified. The city can't sell its portion of the Detroit-Windsor tunnel until at least 2020, and the works of the Detroit Institute of Arts are currently being appraised by Christie's auction house, Buckfire testified.
The city also is looking to lease the Detroit Water and Sewerage Department to a regional authority. Detroit Emergency Manager Kevyn Orr proposed the deal in June, and negotiations are ongoing. But Buckfire testified that several private equity firms were potentially interested in purchasing the department if they could charge higher water rates.
Buckfire's testimony was part of Detroit's efforts to convince Judge Steven Rhodes that Detroit meets the legal requirements of municipal bankruptcy.
Lawyers representing unions, retirees and pension funds who oppose the bankruptcy will be able to question Buckfire, the third of five witnesses the city is expected to call, when the trial resumes Friday morning.
Gaurav Malhotra, a financial analyst who has advised the city since 2011, testified earlier Thursday that Detroit could improve its cash flow only by restructuring its pension and health benefits, not by selling assets or deferring payments to its pension funds. Even if the city could sell some assets, the proceeds would do little to close the more than $18 billion in liabilities the city faces, he said.
The city expects to wrap up its case on Friday.
Michigan Governor Rick Snyder, who appointed emergency manager Orr, is expected to testify on Monday. The trial could wrap up as early as next Tuesday.
Rhodes is not expected to make a ruling on eligibility until at least mid-November.
(Reporting by Joseph Lichterman; Editing by Kenneth Barry, David Greising and Lisa Shumaker)