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Thursday, December 12, 2013
Detroit Bankruptcy Update - Christmas 2013
DETROIT—"The most powerful man in the Motor City says he has one regret since driving into town in March."I probably underestimated the level of support and the willingness of the majority of the citizenry to see us move forward," Detroit Emergency Manager Kevyn Orr said in an interview late last month.
The jury, however, is still out on whether the 55-year-old corporate-bankruptcy attorney from suburban Washington can navigate the city of 700,000 through a bankruptcy reorganization unparalleled in U.S. history.
Detroit Emergency Manager Kevyn Orr spoke to reporters after a court ruling allowed the city's bankruptcy to proceed. In an interview before the ruling, he said, "I probably underestimated the level of support and the willingness of the majority of the citizenry to see us move forward." Reuters
To be sure, Mr. Orr and his boss, Michigan Gov. Rick Snyder, scored a sweeping win Tuesday when U.S. Bankruptcy Judge Steven Rhodes ruled that Detroit, the largest city to file for municipal bankruptcy, is eligible to reduce its $18 billion in long-term obligations under court protection. Most critically, the judge affirmed Mr. Orr's authority as emergency manager as well as his power to cut future payments to city pension funds, with court approval.
But the judge, in his 143-page opinion, also criticized Mr. Orr.
"At the June 10, 2013, community meeting, Mr. Orr was asked a direct question—what is going to happen to the City employee's pensions?" the judge wrote. "Mr. Orr responded that pension rights are 'sacrosanct' under the state constitution and state case law, misleadingly not stating that upon the City's bankruptcy filing, his position would be quite the opposite."
The judge also found that Mr. Orr misled another questioner when he said in the same June meeting that the city's chances of bankruptcy were 50-50. Mr. Orr, the judge wrote, knew "in fact there was no chance" of avoiding a Chapter 9 filing.
Mr. Orr has acknowledged using the term "sacrosanct" but said he always told people in meetings that all options for the city were on the table. "People have taken that one statement out of line," Mr. Orr said in the interview last month.
There are signs Mr. Orr still thinks his tenure in Detroit will be a short one. He lives out of a hotel and flies home to his family in Maryland on weekends. The only personal effect in his 11th-floor office in city hall is a picture behind his desk of his son's soccer team. He has said that he hopes to complete his work by the fall of 2014.
Detroit's current and incoming mayor have questioned whether Mr. Orr should be managing the bankruptcy
and running the city while Detroit's elected officials remain on the payroll. Mr. Orr has kept many officials,
including Mayor Dave Bing, in their posts but has also hired experts of his own to help manage the city.
"I think I know more about city government than he does, because I've been here 4½ years. He could have utilized what I learned to help him," Mr. Bing said last month, adding that "running city government is not [Mr. Orr's] strength."
In January, Mike Duggan will take over as mayor. Though he has said he is strongly opposed to the emergency-manager law, he is pledging to help Mr. Orr.
"Every turnaround starts when the leaders face reality as it is and not as you wish it to be, and the reality as it is is that the emergency manager is in charge," Mr. Duggan said. "If I'm going to improve city services, I'm going to deal with reality as it is."
So far, Mr. Orr has been welcoming but noncommittal about Mr. Duggan's future role in the city. He declined to say whether he would take the mayor-elect up on an offer to become Mr. Orr's chief operating officer and run the city day to day.
Up next, Mr. Orr and his team are putting potential price tags on the city's assets, including its art collection, and negotiating with creditors in court-ordered mediation. Meanwhile, he continues to try to improve city services.
Since taking office in March, Mr. Orr said crime has dropped, streetlights have been relit, blighted structures razed and millions in public and private dollars collected to lease new police cars and fund small businesses.
Many parts of city government—water, transportation, public lighting, trash pickup and more—could be taken over by authorities and private contractors, officials say. Other capital projects, including a new public-private light-rail system in downtown Detroit and a proposed professional hockey-arena complex, are on track, according to officials.
But Mr. Orr has also drawn some darts for pushing through a long-term lease with the state for the city's premier island park, Belle Isle, and hiring auction house Christie's to value the city-owned collection at the Detroit Institute of Arts for a potential sale. Mr. Orr has said he would prefer not to sell the city's art.
The fate of the city's pension holders has also been a contentious issue. Mr. Orr said in the interview that he is sticking by his estimate that the city owes the pension funds $3.5 billion, with almost no way to pay the bill.
Other challenges ahead for Mr. Orr include gaining court approval for refinancing $350 million in secured debt and raising new money to pay off what the city still owes. Both moves are expected to be opposed by some creditors at court hearings later this month.
But the largest question looming for the city is how Mr. Orr will draft his overall plan to cut the city's long-term obligations and revamp its infrastructure. The plan expected by early January is likely to include $1.25 billion earmarked for reducing crime and eradicating vacant and dangerous structures, which Mr. Orr hopes to complete within three years.
One thing is for certain, according to Mr. Orr: Bankruptcy was the only prescription for the city's ills.
"I think, without a doubt, it was necessary for the city," he said."
Update December 12, 2013
Detroit Institute of Arts officials confirmed
Wednesday they’ve met with federal bankruptcy mediators over a plan to safeguard
the museum’s art from sale, but some local cultural leaders are concerned that
what’s good for the DIA might not be so good for them.
For weeks, Chief U.S. District Judge Gerald Rosen has
been in talks with local and national foundations about a plan under which they
would put up the lion’s share of money, perhaps as much as $500 million, to
satisfy Detroit Emergency Manager Kevyn Orr’s demand that the DIA contribute to
the city’s path out of bankruptcy.
But in a world with finite resources, local cultural
leaders — who express great affection for the city-owned museum — worry that
largesse on a scale necessary to rescue the DIA could mean sharply reduced
foundation grants for everyone else.
“If the DIA can come up with this grand bargain,” said
Vincent Paul, president of the Music Hall Center for the Performing Arts, “I’ll
be the first to toast it. I just don’t want to take a hit from it. There’s just
a finite amount of money out there.”
At the Michigan Opera Theatre, founder and general
director David DiChiera said if such a fund satisfied Orr’s requirement and the
city relinquished ownership as part of any deal, he’d be all for it.
“But we all get support from these foundations,”
DiChiera added. “We wouldn’t want to hear they have to reduce their support to
us because they made this significant gift to the DIA.”
In a prepared statement Wednesday, the DIA
acknowledged it met with mediators on Tuesday and said it would engage in
vigorous fundraising to contribute to any fund — one of Orr’s stipulations.
Museum officials declined to comment further. Before
the museum was invited into the negotiations last month, director Graham Beal
told The Detroit News he applauded Rosen, saying: “It would be wonderful if
someone could do something like this.” Rosen was appointed to help mediate the
bankruptcy case by U.S. Bankruptcy Judge Steven Rhodes.
Local foundations reportedly in discussions with Rosen
include Kresge, Hudson-Webber, Skillman, Mott, Kellogg and the Community
Foundation for Southeast Michigan. National organizations such as the Ford
Foundation and Knight Foundation also are reportedly involved.
Foundation grants account for 10 percent of the $1.6
million in contributions the Music Hall raised last year, according to Paul. In
that respect, he’s less exposed to any future cutback in grants than MOT, which
pulled in a total of $4 million in contributions, of which 20 percent came from
foundations. The Detroit Symphony Orchestra raised $18.9 million, with
foundation dollars also making up 20 percent.
Overall, DSO vice president Paul Hogle takes an
optimistic view, contending foundation giving isn’t a zero-sum game — a win for
one is not necessarily a loss for another.
“The symphony and everyone else has an extraordinary
case to make to any funding partner,” Hogle said. “Past history suggests
foundations believe it’s a ‘both/and’ question, not an ‘either/or’ one.”
Negotiations on a DIA rescue package are ongoing, and
likely to be affected not only by federal mediation, but also by Orr’s talks
with creditors. Also bearing on how much Orr will require from the DIA will be
Christie’s lower-than-expected appraisal of the museum’s top couple of thousand
objects, which came in at $452 million to $866 million, far below the billions
The problem with going to foundations in a crisis is
that they plan several years out and usually can’t make abrupt shifts, said
William Schambra, a senior scholar at the Hudson Institute, who studies
bankruptcy. He noted the Troy-based Kresge Foundation, which has brought other
national foundations into the city in recent years, already has a meticulous
strategy for how and where it wants to invest in Detroit.
“They’ve said every grant they make in Detroit will be
guided by that grand plan,” Schambra added. “What the court is saying to the
foundations is almost insulting — in essence, ‘You guys have your grand plans
for the city, and that’s all fine and good. But we desperately need cold hard
cash right now.’ ”
Still, the fact that Rosen has invited the DIA into
discussions may suggest more movement than some would have expected.
For his part, DiChiera has in mind one scenario
involving rescue by a foundation that hasn’t been involved in a big way in
Michigan for decades: Manhattan-based Ford Foundation, which is not connected to
Ford Motor Co.
“I probably shouldn’t even say this,” DiChiera said,
“but what a wonderful gesture it would be for a major foundation that came out
of this community and has mostly been involved in the Third World to give a
significant part of any rescue package. That way foundations that have
contributed heavily to Detroit cultural institutions wouldn’t be as badly