Exit Strategy

Detroit Emergency Manager Kevyn Orr on the city’s historic Chapter 9 bankruptcy and what it means for the future of the municipality.
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Three days after former Mayor Kwame Kilpatrick was convicted in March 2013 of stealing millions of dollars from the city of Detroit — the final act in the city’s decades-long slide into financial ruin — Kevyn Orr, a 55-year-old bankruptcy lawyer from Washington, D.C., was anointed by Gov. Rick Snyder to save the Motor City.

In an inauspicious start, Orr, the city’s first emergency manger, accompanied by a four-member State Police security detail, walked into a nearly bare 11th-floor office in the Coleman A. Young Municipal Center to assume the dictatorial power that came with his appointment.

The office had a desk, a chair, a credenza, a computer, and a view of Hart Plaza and the nearby Renaissance Center — a far cry from the luxurious suite he was used to as a partner at Jones Day, a law firm based near the U.S. Capitol in Washington, D.C. The firm, founded in 1946, has more than 2,400 attorneys spread across five continents.

Using a combination of charm, savvy political instinct, and a velvet glove approach to Detroit’s elected officials, who were rendered all but powerless under the state’s emergency law, Orr defused the furor that first erupted when he was appointed by a Republican governor to reinvent a Democratic Party stronghold.

With help from a cadre including bankruptcy lawyers from Jones Day, others from New York City, and local restructuring experts Conway MacKenzie in Birmingham, Orr filed the nation’s largest municipal bankruptcy petition in federal bankruptcy court on July 18, 2013. 

With unprecedented speed and urgency, the city emerged from bankruptcy last November. It was $7 billion lighter in debt, and had both a restructured financial balance sheet and a blueprint for good governance moving forward.

ANATOMY OF THE DEAL // CLICK HERE

With his tenure as emergency manager winding down, Orr reflected on the bankruptcy process — the highs and lows of what was, at times, an incredibly arduous set of negotiations with creditors, meetings with union personnel, and the Grand Bargain.

Coming in as a relative outsider to Detroit, was that an advantage or a disadvantage?

It was both. It was an advantage to the extent that you’re coming in and getting an objective look at the city, unlike a politician — where you have relationships, where you’ve campaigned, where you have obligations to supporters and opponents. That’s the nature of politics. I was a nonpolitician just trying to be objective without regard for what this might mean to my political future, or to people to whom I might have made commitments, which is (also) the nature of politics. Reciprocity, if you will. It was a disadvantage because at first everybody thought I was coming here as an operative, eyeing all these assets. We had to cycle through that cynical view and that way of thinking before people could see I was just an honest broker.

When you took over, were you surprised by the financial straits the city was in? Or was it about what you anticipated?

No, I was not surprised. I had already read a wealth of material — the Detroit Review Team reports, the Memorandum of Detroit Reform, the governor’s  findings, and the declaration of financial emergency — and my own independent sort of due diligence analysis. There was a lot of objective data that I was privileged to, so the numbers didn’t surprise me, although those numbers increased as we got to it. I guess the thing that was a little surprising was the mechanics. The city’s computer systems, in some cases, were more than 12 years old and couldn’t communicate with each other. The employees of the city hadn’t had a training budget in several years; at one point, 90 percent of all parks had been closed or were overgrown. The police force had been on 12-hour shifts with all that was going on. Why is that important, besides being fatiguing? When I first talked to some of the officers, they weren’t just wanting time off, they were wanting court time. They wanted eight-hour shifts so they could go to court to testify against people they arrested. With a 12-hour shift, they barely had time to take breaks, take a shower, or brush their teeth and go home and see their families from time to time. They just wanted to do their job in a normal way. They were already suffering under a 10-percent pay cut while being worked that way. Forty percent of the police cars, ambulances, and emergency vehicles were out in the depot for repairs, beyond their useful lives and over-run.

one and done Orr, joined by Mayor Mike Duggan and Gov. Rick Snyder, among others, answer questions from the media on Nov. 7 when U.S. Bankruptcy Judge Steven W. Rhodes gave the approval for the city to plan an exit strategy from its Chapter 9 bankruptcy.What were the most surprising and least surprising things you encountered in city hall?

The least surprising were the balance sheets and the finances; the most surprising part was the depth of work that had to be done on the operational side.

What was the most rewarding development concerning how the bankruptcy deal came together, and what were the highs and lows?

I’ve been doing this (job) for a little while, 30 years, so I didn’t see any highs and lows. I’ve been in other contentious matters, and knew this was going to take some doing — and you have to get the parties wrapped around the point that bankruptcy is negotiations, and it’s especially hard when you’re asking  people, in a sense, to cut their own salaries and compensation, especially when it’s pensions. That’s hard. You just don’t want to walk into work one day and tell someone (you’re) going to cut their retirement pay. That’s a hard thing to do, but I’m used to that. As for a low point, it wasn’t just a low point as much as the realization, the week before I made the recommendation to the governor that we file bankruptcy, that no matter how much I thought we had tried and tried to be transparent, and work diligently to implore people to negotiate with us, that was not happening. In fact, I lost count of the number of lawsuits and motions and injunctions on the creditor side and the labor side. There were a series of litigations that occurred the week before we made the recommendation, (and) finally my advisers came in and strongly suggested we weren’t only losing the potential to negotiate in good faith, but we were also getting into chaos where we wouldn’t have the ability to negotiate because we would be in constant battles. That wasn’t a low point, but more of a realization that our consensus-based path wasn’t going to work without the bankruptcy letter. The high point, obviously, was when we finally got both of our most ardent creditor opponents in court to agree to a consensual plan. Everyone assumed that was never going to occur and we were going to have a contentious cram-down plan throughout the process. That result was achieved in the 11th-and-a-half hour and was most satisfying, and it was a very good ending.

 

Was there any time during the process where you thought the bankruptcy plan wouldn’t work?

No. I had a level of confidence, having done this before, and with the federal government — the concept of federal supremacy over state law; for instance, cutting pensions, where federal law says you can. The issue for me was trying to convince the pensioners that the proposal we had out for them, the $816 million, was a better outcome than saying ‘no,’ because that would seem like cutting off your nose to spite your face. Eventually they did vote yes, by over 80 percent. The other (difficult) component was that by the time we got the $816 million from the state, the foundations, and the DIA (Detroit Institute of Arts) funders, we would have to get some value for the city’s most significant asset, the DIA (the so-called Grand Bargain), and that began to take the form of a potential sale — and that would be a scar on the city’s relationship with its largest cultural asset. That started to concern me and, if that were to happen, it would have been an unfortunate byproduct for me to carrying out my fiduciary duty to sell those assets.

Was there a time when you thought you had to sell the DIA’s treasures?

Oh, sure. Remember, we invited Christie’s (auction house) in April (2014) to come in and appraise the art institute’s most significant assets, and then we asked them to go away because there was a furor in April that was distracting us from what we were trying to do — that was to get to the proposal for creditors and not get caught up in the DIA issue. We wanted that to stand alone. In August, we asked them to come back because, at that point, we had gone from April, May, June, July, and essentially August. Almost five months, almost a third of my term, we were dealing with the DIA.

Did you envision the Grand Bargain orchestrated by Judge Gerald Rosen?

The Grand Bargain was certainly a significant milestone. It was a turning point, without a doubt. It was a springboard for the pensioners and the DIA. It allowed us to focus on health care reform, and it removed an issue potentially contentious with our labor creditors as well as our financial creditors. It reduced (the battle) from a multifront war to a single front. And frankly, when has the city ever got almost a billion dollars in contributions before? It was extraordinary.

What party was hardest to work with, and who was the easiest, and why?

I think they were all equally hard. Everybody. Once we got into July 2013, with the bankruptcy filing, I think everybody said, OK, we’ve got to get down to brass tacks and negotiate. We made some progress there, but then their positions immediately started to change. The retirees (said), ‘Well, take it out on the active employees,’ and the active employees said, ‘The retirees already got their pensions and health care, what about us? We’re here making the city run.’ The financial community (said), ‘Wait a minute, we lent real money based upon a promise that is usually safe for municipalities to pay their bills on time, and this has never been violated before.’ The secured creditors said, ‘The unsecured took the risk of being unsecured, but we were secured, so we should have first dollar priority over and above them or everyone else.’ The unsecured creditors said, ‘That’s not fair,’ and some (other) unsecured creditors said, ‘You don‘t have a pledge agreement, so you should stand on par with us.’ Everybody recognized the need for there to be a restructuring adjustment, but everybody (believed strongly) that it shouldn’t be focused on them.

LEGAL POINT // CLICK HERE

You recently joked at a breakfast attended by more than 200 businesspeople at the Oakland County Business Roundtable in Troy that your early definition of success was getting out of town without being indicted. What do you hope to see in the near term and the long term, going forward? 

In the near term, you’re already seeing success over and above where we were a year ago. A year ago, in June and July, we were bouncing payroll checks. When the lights went off last summer (2013) during a rainstorm, we had to come up with a bootstrap way of fixing something. Lights go out in all cities. This time (when the power went out in downtown Detroit in December 2014), we had the resources and ability to change that because we had put in place a transition plan to get off the city power grid and onto DTE Energy. We have the ability to strategically plan and to deal with situations like this. The Lighting Department, for years, had been subsidizing 115 customers — only five of whom were residential-based customers. The other 110 were corporate, health-care related, and educational institutions up and down the Woodward corridor, a subsidy of $30 million. The city was paying $30 million for the light bill. Now that the city’s getting out of that business, it can redirect that $30 million a year to something else. Certainly downtown you see a renaissance. You see the amount of energy and focus on nine square miles of downtown: the Illitch (hockey) arena (and five new neighborhoods around it opening in fall 2017 at I-75 and Woodward), and potentially the redevelopment of Joe Louis Arena into an office and condo building. The M-1 light rail line will get done (in fall 2016). Long-term, you want to see some of this energy and vibrancy push out to the neighborhoods, and that’s a much more complex, long-term issue. Hopefully, continued development, growth, and expansion in the city won’t make the leaders a decade or more from now become complacent. When the issues and the travails that we went through in this process become a very dim memory, you hope they don’t believe that because we’re doing better, we don’t have to think about that anymore. That would be unfortunate. 

 

What advice would you offer Mayor Mike Duggan and the City Council going forward?

I don’t think I need to give them advice. I must give them credit because it was difficult for the council and mayor, having gone through an election, to make the determination to work with me and my team as opposed to be in conflict. The real beneficiary here isn’t the political wherewithal of the elected officials, but it’s the citizens, residents, and businesses, and (they determined they should) put aside adversarial political leaning, one way or another, and deal with what is good for the city. They recognize the city has been given a new life. They recognize there’s a different level of resources than the city had a year ago. They have publicly stated in court that they’re committed to restructuring, and the plan of adjustment, to move the city forward. They also recognize that the eyes of the city, region, and state — if not the world — are on (them).

What’s your view of Gov. Snyder’s role in the bankruptcy saga of Detroit?

It was a profile in courage for Rick Snyder, (then) a brand-new politician who got nothing politically out of Detroit (to take this course). Many predecessors before him, for whatever reason, had chosen not to take on the problems of Detroit, even as it got worse. I think he deserves a great deal of credit for doing what a chief executive is obligated to do, which is to address dysfunction and inefficiencies in any organization irrespective of political consequences. I really think people don’t appreciate what (courage) that took. It started with a newcomer, a nonpolitician, coming in and saying, ‘I’m going to take on Detroit. It’s been 50 years of neglect, but I’m going to take it on.’  

What does your future look like?

I don’t know yet. I originally planned on being done by October, and (to) take off October, November, and December and job-hunt, then take off January and February just to download and decompress, and start again in the spring. I’ve lost that three months, and I’m a couple months behind from where I would like to be. I have intentionally not entertained — or pursued — any further opportunities until I was done here. I honestly don’t know yet.

There are still some critics around who believe you’ll be returning, well-rewarded, to Jones Day. Is there any chance of your going back to them?

Of course there’s a chance. Everybody says that, but nobody has knocked on my door yet. A lot of people in this town, when I first started, said, ‘Of course, Kevyn won’t resign from Jones Day. Why would he give up a lucrative position to do this job?’ I think some of the press went to these legal ethicists and professors at the University of Michigan (and found out) that, frankly, trustees in bankruptcy don’t have to do that. But I did. I resigned. (I’ve been) paying COBRA for 18 months. I don’t have disability insurance. I severed, completely, my relationship with my prior employer. As I sit here right now, I have no offers or tender in hand. I want to get to that soon, but I really wanted to close this out before I got to that. db

 

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