"The problems we are addressing are more than 60 years in the making": A Public Sector Inc. Q&A with Kevyn Orr

Kevyn Orr is the emergency manager of Detroit. Since being appointed to that position in March by Michigan Governor Rick Snyder, he has held chief responsibility over all fiscal and administrative matters, including, most notably, those related to the city’s historic bankruptcy. Mr. Orr has had to master, in short order, Detroit’s notoriously complex financial arrangements, negotiate with union and Wall Street creditors, explain, on an ongoing basis to the public, why Detroit needs bankruptcy and other such extraordinary measures, and maintain a pace that will enable the city to exit bankruptcy before his term ends next September, all the while ensuring that government services not only continue to function, but actually begin to improve as Detroit struggles to get its fiscal house in order.

In the wake of Detroit’s being ruled eligible for municipal bankruptcy on December 3rd, Public Sector Inc. submitted a series of questions to Mr. Orr about his strategy towards the bankruptcy and reforming Detroit city government more generally. Below are the responses.

Q: Now that Detroit’s formally eligible for bankruptcy, all attention will shift to the so-called plan of adjustment, said to come out in early January. How similar will the plan of adjustment be to the “Proposal to Creditors” you presented on June 14th?

A: It will be similar in many respects but also different.  Think of it as a starting point.  Since the city filed for bankruptcy in July, many of the items outlined in the proposal to creditors are now the subject of ongoing federal mediation and the plan of adjustment will reflect some of the work that has gone on in that process.

Q: Do you intend to treat all unsecured creditors exactly the same under the plan of adjustment?

A: The City has been consistent on this point; creditors within a class will receive equal treatment. Federal bankruptcy law requires equitable treatment.

Q: The plan of adjustment must be approved by a majority of creditors. Why would any creditor, in bankruptcy, approve a plan of adjustment in which his claim is impaired?

A: The federal bankruptcy code actually is designed to spur consensual negotiations between parties. Terms reached between the City and its creditors have the ability to become part of the plan of adjustment before it is voted on. In that instance it would be in a creditor’s best interest to support of a plan of adjustment that includes items it has negotiated and agreed to. For impaired parties still opposed to a plan of adjustment, there is the risk of a “cram-down” from the court.

Q: Regarding the holdings of the Detroit Institute of Art, it’s my understanding that, under Ch. 9, creditors can’t demand sale of any assets. And yet you have been open about your desire that the Art Museum should somehow contribute to a settlement with creditors. Why have you insisted on putting the art on the table?

A: All of the City’s assets are “on the table” as we look at creating a proposed plan of adjustment that attempts to rationalize the city’s cash flow and obligations.  The city-owned art at the city-owned Detroit Institute of Art is no different.  At this time, no decision has been made to sell or monetize any of the city-owned art, just as no decision has been made to sell or monetize any of the city’s other assets. It should be noted that several of the City’s creditors, including its largest labor union, have asked the bankruptcy judge to order a second valuation of the city-owned and purchased art at the DIA.

Q: Regarding the Barclays deal, which the city council rejected in October: Some have suggested that, if the city is so desperate to access revenues in the near term, it should turn to state government for help with financing. Did you pursue that option, and, if not, why not?

A: No. It was made abundantly clear that a state bailout of Detroit’s finances was not a possibility.

Q: In one of the very few losses for the city, Judge Rhodes claimed that Detroit did not satisfy the “good faith” negotiation requirement. Looking back now to your talks with creditors during May and June, is there anything you would have done differently?

A: While the judge ruled that the city didn’t negotiate in good faith, he also found that it was impracticable for it to do so. With more than 100,000 individual creditors, 43 unions and untold bondholders, we don’t believe it would have been practical to negotiate in good faith with such a large cohort.

Q: Technically, you were appointed as emergency manager not only to bring “prudent fiscal management” to Detroit but also “an efficient provision of municipal services.” What do you think you have been able to accomplish thus far in the way of making Detroit city government more efficient?

A: The city has made great strides since I was appointed emergency manager, but there is still much work to do.  The problems we are addressing are more than 60 years in the making and won’t be solved in a few months.  But we are making steady progress. One of my first actions as emergency manager was to appoint a new police chief who could be a change agent for the department. In just a few months, Chief James Craig has improved police response time from more than 50 minutes to less than 11 minutes, he has increased street patrols and violent crime is on the way down. The city also has repaired or replaced more than 26,000 streetlights since May, lights that have been out for years, and we created a new Public Lighting Authority that will take over control and maintenance of the city’s lighting grid. The city recently announced plans to privatize residential garbage collection. This effort will save more than $6 million a year while adding citywide curbside recycling and bi-weekly bulk collection in addition to weekly service for every address in the city.

Q: Many are skeptical about your timeline. What happens if you haven’t reached an agreement with creditors by the time your term as emergency manager expires?

A: I am confident about our team’s ability to meet the aggressive timeline I have laid down.