Saving Detroit: New Manager Targets ‘Greatest Turnaround’ in U.S. History

By Mark Guarino

March 14, 2013

From The Christian Science Monitor

The man slated to guide Detroit to fiscal solvency in the largest state takeover of a city in United States history described his new job Thursday as “the Olympics of restructuring.”

That could be an understatement.

Michigan Gov. Rick Snyder (R) has stepped in to appoint Kevyn Orr, a restructuring specialist who represented Chrysler during its 2009 bankruptcy, as emergency financial manager for the Motor City.

Mr. Orr comes to a city that is drowning under nearly $15 billion in long-term debt and undergoing major population loss. Moreover, the state’s decision to intervene has been fraught with racial undertones, and the Detroit City Council has made it clear that it wants the governor to butt out. Some of the more than 40 unions currently under contract with the city are expected to take legal action if they’re asked to take too large a cut.

Orr spoke to the difficulties ahead when he told reporters at his introduction Thursday: “If we can do this, I will have participated in the greatest turnaround in the history of this country and something I can tell my grandkids about. It is very inviting and exciting.”

Earlier this month, Governor Snyder declared the city is suffering a financial emergency. A state review found Detroit has been dealing with annual deficits since 2005, and that it has unsuccessfully sought to fix them through long-term borrowing.

While Mayor Dave Bing says he intends to cooperate with Snyder and Orr, the city council has opposed state intervention since last summer, when members launched a legal challenge to the consent agreement that gave the state a larger role in overseeing the city’s finances.

“Whoever is picked, they will make that person’s life is extremely difficult, professionally and personally,” says Ken Sikkema, a senior policy fellow at Public Sector Consultants, a public policy think tank in Lansing, Mich, and a former Republican majority leader in the state Senate.

That resentment has festered over decades. As the population of Detroit has dwindled – due to a suffering auto industry and other economic hardships – the city has become more isolated, both politically and racially, from the rest of the state.

Today, Detroit stands in stark contrast with the rest of Michigan: While Republicans control state politics, Detroit is Michigan’s largest Democratic stronghold. Its leadership and population are overwhelmingly black, also in contrast to the rest of the state.

“You’ve got the racial undertones, the union issues, the loss of political power, all of these things are intertwined; you can’t really sort them all out,” says Mr. Sikkema.

The time frame for the emergency financial manager to make a turnaround is 18 months, which “is not enough time” to make a full recovery, although certain things are achievable, says Eric Scorsone, an economist at Michigan State University in East Lansing, who is also on Mayor Bing’s restructuring team.

What can Orr do?

Business leaders say they are anxious for an emergency financial manager to address glaring inefficiencies in the city’s bureaucracy.

“The billing for [property] taxes has been sporadic at best,” says Sandy Baruah, president and CEO of the Detroit Regional Chamber of Commerce and a former US assistant secretary of Commerce under President George W. Bush. “Companies may be getting bills from the tax department that are legitimately owed, but it was news to them, or bills they haven’t received for years. This goes to a competency issue. ”

“The percentage of taxes owed but not collected by the city government, both by residents and companies, is phenomenally large,” he adds. “Just the competency and efficiency in tax collection would go a long way to resolving at least some of the financial challenges.”

To be sure, the city needs cash, since it is expected to have only about $3 million by the end of June. Immediate options include cutting payroll, cutting vendor contracts, and privatizing unessential services. The idea would be to make the city government do less, but more effectively.

“The emergency financial manager has to figure out what are core services and what are non-core services and how do we balance these things,” says Mr. Scorsone of the restructuring team.

“I’d be looking at where can I show some success in terms of reconciling some level of service to the people of Detroit,” such as more street lights, expedited garbage pickup, and additional police on the streets,” says public policy analyst Sikkema. “Something that effects people everyday and makes them say, ‘Wait a minute, life is better than it was.’ ”

Any plan could face opposition from the city’s union leadership, leading to delays.

Another option would be bankruptcy, which could be used as leverage against the unions if they refuse to concede to certain changes, Scorsone says.

On Thursday, Orr said “everything is on the table,” and his expertise is in bankruptcy.

“It’s too early to say bankruptcy is likely, it’s certainly a possibility. We’ll see over the next few months if the situation gets bogged down in lawsuits and nobody wants to agree to anything,” Scorsone says.

Perhaps the greatest challenge is time. With 18 months to steer the city toward a path of financial recovery, Orr needs to show his merit, especially after a year or more of legal wrangling and insider deadlock at city hall.

The problem, after all, was more than a few years in the making, said Mayor Bing Thursday. “The financial crisis didn’t start four years ago, it was out of neglect over the last 40 and 50 years, and people who were in key positions did not make the tough decisions.”

Beyond Detroit, City Takeover May Benefit Michigan Governor

By Nick Carey

Thu Mar 14, 2013 4:20pm EDT

From Reuters.com

(Reuters) – Rick Snyder’s decision to put Detroit in the hands of an emergency financial manager on Thursday may not go down well in the heavily Democratic Motor City, but the Republican governor has the chance to go down in Michigan history as the man who saved Detroit.

The biggest state takeover of an American city in over two decades comes the year before many expect the businessman-turned-governor to seek re-election in 2014. In any political calculating, Snyder probably didn’t count on Detroiters getting him to a second term.

“The people of Detroit are not going to vote for Rick Snyder anyway,” said Bill Ballenger, a longtime pundit and publisher of Inside Michigan Politics. “I think there is a fairly strong majority of people outside Detroit who feel an emergency manager should be appointed.”

For fixing the finances of the majority black city, Snyder tapped Kevyn Orr, an African-American lawyer and life-long Democrat who studied in Michigan and specializes in corporate bankruptcy. At his presentation to the Detroit media on Thursday, Orr acknowledged the political pressures on Snyder, including from those who asked why he was spending so much time on Detroit.

He said the governor told him, “It is the right thing to do and the right time to do it.”

In his first political office, Snyder, the former chief executive of venture capital firm Ardesta, has earned the reputation in the governor’s mansion as a businessman who gets things done, with little regard for the political fall-out. His campaign to rescue Detroit has the tone of an impatient CEO, employing the slogan “Detroit Can’t Wait.”

Orr’s appointment will likely usher in a new period of painful cutbacks for a city long in decline, but he said he wants to avoid sending Detroit to bankruptcy court. Such a filing, if allowed by the state, would be the biggest Chapter 9 municipal bankruptcy in U.S. history.

‘NO DOWNSIDE FOR GOVERNOR’

Formerly home to 1.8 million people, Detroit once had significant electoral muscle in Michigan. But Detroit’s population has fallen to around 700,000 people, or less than 8 percent of the state’s population, and the city has less support in the state capital, Lansing, than it did during its heyday.

The former automotive powerhouse’s decline has long been compounded by financial troubles that are almost as well known as the music that made Motown famous.

“Make no mistake, Detroit is bankrupt,” said Jim McTevia, a specialist in restructuring and managing member of management and financial consultant McTevia & Associates. “In this set of circumstances there is no downside for the governor.

“I think Snyder will be remembered as the politician who saved Detroit.”

Cuts by the administration of Detroit Mayor Dave Bing to stave off the appointment of an emergency manager were vigorously opposed by some members of the city’s council.

There have also been small protests in the city over the prospect of an unelected official taking over Detroit’s purse strings. Pastor D. Alexander, a local leader of Jesse Jackson’s Rainbow PUSH Coalition, said Snyder would suffer for a takeover if he runs for a second term in 2014.

“Governor Snyder risks wakening a sleeping giant,” he said. “If Detroit comes alive, he will not be re-elected.”

On Thursday, flanking Snyder and Orr, Bing showed his support for the emergency manager, saying, “There is no doubt that we are going to work together.”

‘PRAGMATIC, NOT DOGMATIC’

McTevia, the consultant, said a crucial point for Snyder is that any emergency financial manager will need help from city officials to succeed.

“This will take team work to fix,” he said.

Michigan’s governor also has the support of much of the local business community, which has applauded his support for a new bridge to Canada, which many conservatives oppose, and for regional transit and lighting authorities in Detroit.

“The reason why we are so supportive of the governor is that here’s a Republican who has clearly chosen to support Detroit,” Sandy Baruah, chief executive of the Detroit Regional Chamber of Commerce. “Governor Snyder is very pragmatic, not dogmatic.

“He’s all about getting stuff done.”

Lyke Thompson, a political analyst at Wayne State University, said that while taking over Detroit’s finances “could be a win” for Snyder if the move is successful, the opposite would be true if the city ended up in bankruptcy as that “would happen on his watch.”

“Things could get worse before they get better,” he said.

Whether or not Snyder worries about what effect a state takeover would have on his re-election chances in 2014 is another matter. His office did not respond to a request for comment.

Since taking office in 2011, Snyder has frequently annoyed small-government conservatives, as he did last month with a plan to expand Medicaid and raise the gas tax for road repairs.

The governor also incensed liberals and the labor movement in December by signing “right-to-work” legislation that allows workers to opt out of union membership.

“I think the governor looks at issues through the eyes of a businessman and looks for solutions,” said Pat O’Keefe, CEO of turnaround consultant O’Keefe. “I don’t think Rick Snyder cares one way or another if he doesn’t get reelected.

“And if he is successful he will have essentially established the blueprint for restructuring a major city’s finances.”

(Editing by Mary Milliken and Leslie Adler)

Detroit Regional Chamber says it supports governor’s decision to appoint emergency financial manager

From MLive.com

March 4, 2013

By David Muller

DETROIT, MI – The Detroit Regional Chamber says it supports Gov. Rick Snyder’s decision to appoint an emergency financial manager for the city of Detroit, saying such an appointee would be able to make “quick and difficult decisions that have eluded city government.”

Snyder announced his decision to appoint an emergency financial manger for the city Friday at Wayne State University. He said he has a candidate in mind. His announcement began a 10-day period in which the city can appeal.

Last month, Detroit Regional Chamber CEO Sandy Baruah told international business journal The Economist that an emergency financial manger would be “both expected and welcomed.” The statement released by the chamber in the wake of Gov. Snyder’s decision reiterated some his comments.

In the statement, the chamber says that while there are “tremendous revitalization efforts occurring in the private sector,” there is still a “final barrier” to Detroit’s rebirth: financial and government stability.

“While there has been important progress under Mayor Dave Bing, the Chamber echoes the Governor’s sentiments that the status quo is no longer acceptable and the city’s citizens, neighborhoods and businesses deserve more rapid change,” the chamber’s statement reads.

Detroit faces $14 billion in long-term debt and an annual deficit of $327 million. Many of its 700,000 residents, which is less than half of its peak population six decades ago, are having trouble paying their taxes amid widespread poverty.

“The Chamber encourages business leaders to continue to distinguish between the fiscal challenges facing city government and the positive business trends in Detroit, and to continue to work with public and private partners to revitalize Detroit,” the statement reads.

Detroit Regional Chamber Supports Gov. Snyder’s Call for ‘All Hands on Deck’ to Transform Detroit

Private sector recovery needs long-term fiscal solution for city.

The Detroit Regional Chamber supports Governor Rick Snyder’s call for increased collaboration and “all hands on deck” as he declared the city of Detroit in financial emergency during a special town hall meeting today at Wayne State University. Chamber CEO and President Sandy K. Baruah attended the event to show support for the Governor and the new path forward, building on the positive growth under way as the business community leads Detroit’s transformation.

As demonstrated during yesterday’s Detroit Policy Conference, the tremendous revitalization efforts occurring in the private sector speak to the unrivaled potential of the Motor City. The final barrier to Detroit’s ongoing renaissance is financial stability and local government stability – an emergency manager will be in a position to make the quick and difficult decisions that have eluded city government. While there has been important progress under Mayor Dave Bing, the Chamber echoes the Governor’s sentiments that the status quo is no longer acceptable and the city’s citizens, neighborhoods and businesses deserve more rapid change.

The Chamber encourages business leaders to continue to distinguish between the fiscal challenges facing city government and the positive business trends in Detroit, and to continue to work with public and private partners to revitalize Detroit. As the Governor said: “Let’s come together as Detroit, Michigan – not Detroit versus Michigan.” Read more from the Governor on his blog.

The Governor is encouraging an open dialogue on the topic of an emergency manager. For more information or to share your input, visit the Governor’s “Detroit Can’t Wait” website.

Michigan to Appoint Emergency Manager for Detroit

From The New York Times

March 1, 2013

By Monica Davey

DETROIT — Over the fierce protests of this city’s elected leaders, the State of Michigan plans to send an emergency manager to repair the deeply troubled finances of Detroit, one of the largest cities ever to reach such a dire point or to face such a level of oversight.

“There is probably no city that is more financially challenged in the entire United States,” Gov. Rick Snyder said on Friday as he explained why he had deemed Detroit’s woes too fundamental, too lasting and too large to be solved by the city itself.

Mr. Snyder’s call for an emergency manager, who would wield sweeping powers to reshape the city, underscored a long, troubling arc for Detroit. Once the cradle of the American auto industry and the nation’s fourth most populous city, it is now less than half the size it was decades ago and has a public sector plagued by more than $14 billion in long-term liabilities and annual worries of cash shortfalls.

The notion set off a flurry of pointed and sometimes emotional reactions here, including an unavoidable racial and political component. Detroit is a mostly black city dominated by Democrats in a mostly white state where Republicans, including Mr. Snyder, control the capital.

At a time when many municipalities are struggling financially, five cities and three school districts in Michigan alone are already under supervision from a state-appointed emergency financial manager. But municipal finance experts pointed out that Detroit is on a different scale. “Detroit is a huge and prominent American city, so anything that happens with Detroit will set a much bigger precedent,” said Matt Fabian, a managing director at Municipal Market Advisors. “There isn’t a lot of precedent with the state taking control of a city this size.”

For decades, states have used a range of methods, including oversight boards and appointed receivers, to step in and stabilize cities that appeared to be headed toward bankruptcy or default. The methods — and the powers and roles of those charged with overseeing a troubled city — vary widely from state to state, as do opinions about whether they work. A financial control board helped New York City return from the edge of crisis in the 1970s, but such intense state involvement is more often needed in smaller cities.

For more than a year, Detroit leaders had raced to ward off an emergency manager. With a similar possibility looming last spring, city officials entered into a legal deal, giving the state some oversight as Detroit tried to cut spending and staff members and collect more tax revenue. It was not enough, said state officials, who re-examined the city’s books in recent weeks and said they found a pattern of overly optimistic revenue estimates, poor and conflicting record-keeping and endless borrowing to make up for shortfalls.

“There have been many good people that have had many plans, many attempts to turn this around — they haven’t worked,” Mr. Snyder said on Friday during a town hall meeting broadcast on local television, the start of a concerted state effort to sell the notion of an outside manager to city residents. “The way I view it, today is a day to call all hands on deck.”

While some Detroit residents saw state intervention as one more very public indication of a city crumbling, others hailed it as the first promising sign of real repair. The city’s business leaders lauded the plan, noting that Detroit’s private sector had experienced tangible signs of growth and reinvestment — including newly filled downtown offices and young entrepreneurs opening dress shops — even as the public sector had lagged.

“Bring it on,” Sandy K. Baruah, the chairman of the Detroit Regional Chamber of Commerce, said of state management. “This sends a positive message to business that Detroit is fixing its problems.”

But Detroit city officials, who have 10 days to seek reconsideration from the governor before a state board formally appoints a manager as early as this month, objected strenuously. Under a much-debated state law, an appointed manager would ultimately hold powers to cut city spending, change contracts with labor unions, merge or eliminate city departments, urge the sale of city assets and even, if all else failed, recommend bankruptcy proceedings. In an election year for mayor and the City Council, many candidates, incumbents and community leaders denounced the move as an affront to democracy and a state takeover, and called for legal action.

“For one individual to be able to wipe out the duties of our duly-elected officials, that’s more or less a dictatorship, and it’s against everything that America is supposed to be about,” said the Rev. Wendell Anthony, the president of the local N.A.A.C.P. “If you come into Detroit,” Mr. Anthony said, “you own Detroit. You own education. You own police and fire.”

Mayor Dave Bing, who has not said whether he would seek re-election, was more tempered than most in his critique, suggesting that while he opposed an emergency manager, there might be a way for the state and city to work together. “I will look at the impact of the governor’s decision as well as other options, to determine my next course of action,” he said.

Michigan’s emergency manager law — and the possibility that Detroit, the state’s largest city, might be affected by it — has been a matter of contention for several years. After Mr. Snyder became governor in 2010, he and the Republican-held Legislature approved changes to the state’s two-decade-old law, giving such managers more wide-reaching powers, including the ability to drop union contracts with cities. In November, voters rejected that new version of the law, but the Legislature quickly passed a third version, which also allows relatively broad powers to change the terms of labor contracts and which will take effect this month.

But many here wonder whether any emergency manager, under any version of the law, will be enough to solve Detroit’s woes, which are in some way a reflection of the city’s own story. Beyond the nagging budget questions and the mounting debt is a place that grew with the auto industry into a city of more than 1.8 million residents and 139 square miles, then shrank decade after decade even as the city’s boundaries and infrastructure did not. With a tax base of some among about 713,000 remaining residents, Detroiters complain of late buses, high crime and darkened streetlights.

Mary Williams Walsh contributed reporting from New York.