Event Video and Orr Biography
Thank you, Dean, and thank you fellow alumni and members of the University of Michigan community. You know, it’s interesting, it’s been a year since I started this job, as everyone is saying the anniversary, and if you’d told me this year would go as quickly as it had I would have been surprised.
When I first started the job I was aware Detroit had been in financial straits for some time. Demographically, since the 1950s, when the city peaked at 1.8 million people and it had been declining ever since year-after-year. In fact, from 2000 to 2010, the city lost roughly 25% of its population in one decade. It went from about 1.1 million to about 720,000 and it is now approximately 700,000. So the decline has been demographic but the decline has also been economic.
Those of you who are from the city or ride through the city, who read the stories about the city, have recognized for some period of time that a city that was the economic power of the nation – the Arsenal of Democracy, the Motor City, the city who brought us the living wage, five dollars a day with Henry Ford – a city that even for its day segregation thought of itself as progressive when Henry Ford decided to create Inkster for his African-American workers and Dearborn for his white workers. A city that went through many labor strikes but nonetheless truly emerged from the ashes that Cardinal Richard spoke about. But to really get an understanding of the city I began this analysis back in January when the law firm I was with was coming in to do a pitch to represent the city in its restructuring. And that analysis looked through a lot of data and it’s all available. So the process that I’m involved with actually began almost two years ago. It began with the first Detroit review team which started in February 2012. That review team issued a report that lead to the consent agreement in the city in April 2012. Failure to meet certain metrics of that consent agreement led to the memorandum of Detroit reform in November 2012. That led to another review team on the status of Detroit in December 2012, which created a report in February 2013 which ended in a 21 page finding of facts about the status of the city and the declaration of a financial emergency on March 1, 2013.
So the arc of Detroit’s analysis and recovery has been long and many of the stories and analyses about how we’ve gotten there have been written about for a long, long time. So I usually don’t spend a whole lot of time in a retrospect of looking back as to how we got here. That’s all available and it’s been well publicized. In fact, one of the great books about it is Thomas Sugrue’s “The Origin of the Urban Crisis: Race and Inequality in Detroit.” I’m sure some of you who are in the public policy school study it. It’s quite informative, it *chroniclizes* both intentional and unintentional basis for where we are. What I try to do is explain to people what we’ve been doing in this process – the restructuring process – and where we intend to go from here and then end with what hopefully is some sense of perspective about where the city is going to go.
So, when I was first selected to be a candidate to be emergency manager my initial response was not only “No.” but “Hell no.” I was firmly well-ensconced in my petite bourgeoisie life as a partner at a large corporate law firm, I’d been selected by that firm to go down to Miami and open up our new office. At that point I think it was the 37th office in 18 countries, I believe. Three-hundred sunny days, average 80 degrees in January, house out on [unclear], convertible, it was good living. But when they called the first question I had to ask myself was “Are you willing to step out of your comfort zone to do something for public service?” The great thing about being a Michigan alumnus is that Michigan’s culture of service and commitment to the community, an uncommon school for the common man, is part of what you take away with you when you’re in this institution and you leave. It’s that you have a duty. A broader sense of self. So I began to discuss it with my wife and with my then managing partner. My wife said something which was really sort of instructive. She said, “You know, honey,” she’s actually a surgeon at Johns Hopkins in perinatology, she said, “Honey, we’ll be fine as far as you taking another job, commuting back and forth and being away from home.” We have two small children. “We’ll be fine. But you know you really have to answer this question for yourself, because the thing you have to ask yourself is not whether or not you take the job now, what are you going to say to yourself two, three, ten years from now, when you heard a call to action and you either answered it or didn’t? There’s no harm, there’s nothing that’s going to befall you if you don’t do it, but you have to look inside yourself.” And then my managing partner said to me, “Kevyn, you’re slated.” I was one of the trustees for the firm’s foundation, I was on the firm’s advisory committee, I was the firm-wide hiring partner for 4 years worldwide. “You’re fine here at the institution,” he said something very similar, and then he got a little heavy on me. He said:
“You know, those of us who are fairly comfortable in our environment are frankly, that’s the vast majority of Americans. I mean, we live in air conditioned buildings in the summer, we live in heated buildings in the winter. There are 7.5 million, billion, people in this world. Some of them are people in our armed forces. Some of them are 18, 19 years old and have their whole life in front of them. What makes that individual jump on a grenade for his or her compadres? What makes that individual willing to sacrifice their life – good, back, right or wrong of what you think about any particular conflict at any given time – we ask these young people to put themselves in harm’s way for what we, our elected leadership, says is our benefit. What makes them make the ultimate sacrifice? All I’m being asked to do is still work in an air-conditioned office in the summer and a heated office in the winter, in a particular area of practice that I’ve been involved with for 33 years.”
So putting aside the fact that he shamed me, went a little heavy on it, okay, got a little thick, I had to think about that. Because at the end of the day all of us in ways small and large will be called to action. Sometimes daily. Cut off in traffic, Christmas time, someone doesn’t let you get the parking space. You give them the finger salute, or do you say, “C’est le vie”? You go on. Or big ways. Ways beyond your comfort zone.
So, after thinking about it, and after understanding from an academic perspective the needs of the city – the 18 billion in debt, the fact that either 60% of our fire calls are either arson or non-emergency. The fact that our police waits were initially very long, if someone breaks into your house as someone did to my mother’s house. Three times in two months. It was the kid next door. They caught him one time up in the attic trying to find the alarm system, caught him coming out of the window. She’s an octogenarian. What does she want when she calls the police? For someone to come, you want to hear that siren the minute you hang up that phone. Someone’s on the way. Help is coming. For a city where 20% of our housing stock – 70,000 housing units out of 320,000 – are blighted. And when I say blighted I don’t mean gutters falling down or the shudders need to be painted, I mean 20 year old sycamore trees growing up through the foundation of the building. Those of you who are from the city have seen it, graphically over the years. And anybody who wants to know it, you can drive around the city and see it. And this a great American city. Changed the way we lived.
You look at the debt service. Six billion dollars in secured debt affiliated with the water department, but twelve billion dollars on a one billion dollar general fund budget. That means that if the city shutdown and did nothing, no lights, no police, no potholes, nothing, for twelve years – a dozen years – it couldn’t pay off the debt. If you took 200 million of those dollars – which is what we have average in discretionary budget for the city – and that means every jazz festival, celebration, 4th of July, Winterfest, everything that we do in addition to regular operations, 60 years to pay off the debt. And that’s including no interest compounding. Sixty years. So it was clearly never going to be paid. And here’s the real gravamen of the problem: people talk about the creditor class, depending on which side of the fence you’re on it’s either you’re unfair to the pensioners and unfair to the workers, or it’s unfair to the creditors show leant us actual real money, and they actually have 5th amendment rights against impairment of contracts, and they have property interest, and they really did lend the city 1.44 billion dollars in 2005 and 2006. That’s real money, even in today’s dollars. But putting aside whatever side of the fence you’re on, the real gravamen is 5.7 (billion?) of that was OPEB – public employee benefits – healthcare obligations that the city had promised to pay over the years. Another 3.5 billion were pension obligations which were supposed to be cured by the 1.44 billion that was borrowed in 2005 and 2006. Of the total amount, only approximately 2 billion is funded debt, by the banks and bondholders. So it’s really a case about the obligations the city made starting in the early 50s, 60s, 70s. When I came of age there were roughly 150 workers for every 1 retiree, back in the 60s and 70s. That’s winnowed down now…approximately 2 to 1 worker for every retiree. Fifty percent of all domestic municipal state pension funds are underfunded. In some cities – we have an underfunding obligation of 3.5 billion – Chicago has 19 billion and another billion due this year. This is an issue coming to the fore demographically, economically, politically, kicking the can down the road-ly, everyone has said it for years. So we had to address it in some fashion.
So when we came into the project, as I call it, we divided it up into 3s. The first stage was an honest assessment. To analyze the true nature, extent, depth and breadth of the process and the problems, and then to publish those and put them out. We spent the first few months really trying to do that. First with an initial report – a 30 day report – and then we had a June 10th meeting, and then we had a June 14th proposal for creditors. We just laid it all out. No cant, no gloss. Here it is, here is what we owe. Here’s what we find. Here’s the extent of the problem, here’s what we can’t pay. And to this day, a little bit less than a year, almost a year later, no one has really taken issue with the dollar numbers. No one has found new money. There’s no pot of gold with a leprechaun. Okay? There’s no manna from heaven. It’s real debt. It’s real problems. So we wanted to get that out there as of June 14.
The next stage was plan design. What are we going to do about it? In any restructuring, in a business sense, it’s almost easier. We participate in large cases, Chrysler-Daimler, others. But you gotta balance sheet, you got a product, you’re either trying to save the country, company, in a chapter 11, you’re trying to dissolve it in a chapter 7. And if you’re trying to save it in a chapter 11 you’re trying to grow markets, you’re trying to creativity, use joint ventures, patents, other assets you can use to get that company rebirthed so it can grow organically and reinvent itself. In a city, you’re trying to provide services.
Let me tell you how crucial these services are. We’re down from a high of roughly 300,000 students, school children in the city at 50,000. Our school children ride our city buses. Back in November, I’m up near McNichols, UDC-Mercy, a little girl, a little princess, got a little pink backpack on. She’s as cute as she could be. It’s about 5 o’clock, November, the sun is going down, she’s sitting on a bench, not a shelter, on a bench in the cold by herself. Maybe first or second grade. She’s waiting for that bus. If that bus is late she is out there in the dark. And in a city where 20% of your housing stock is blighted there are monsters in the dark. There are assaults in the dark. Even when the bus comes on time, our young children of tender age are riding public transportation with adults. Some pederasts, some brutal, some older, meaner adults. So every time you hear the word “city services” you think about that little princess. And you ask yourself, do she deserve a better level of services? There’s only one answer, there’s only one answer. Of course. Of course.
But by the same token, you ask the woman who met my mother at the Presbyterian Synod in St. Louis last year. She’s from Detroit. She’s an octogenarian. She raised six children on her own after her husband left her 46 years ago. Stayed in her house, she’s done nothing wrong. City worker. Nothing wrong. Planned her affairs, came to work. She did her job. She retired and now she’s in the fall of her life. She’s not going to go get another job. She has no means to supplement her income, effectively. She came up to my mom and asked her, “Are you the Orr whose son is in Detroit?” She said, “Yes.” She started crying. She said, “Is your son going to cut my pension?” And my mother started crying. When she cries she calls me. When your mama calls you, you tend to listen. I love my mother very much. She says, “Kevyn, do you have to do this?” I said, “Mom. I don’t want to do it but I’m here to make the hard call. That’s my job.” I said, “If I don’t do it, I risk victimizing that little princess, so she won’t get bus service. Her schools continue to degrade. Her housing stock will go from 20 to 25, you’ll have more potholes, the lights will not get turned on. Forty percent of them are off. We will not remove blight. We will do things the adequate level of services that any municipality should be doing for its citizens. That is the purpose of a municipality, to provide services to its citizens, so you can enhance the quality of life and the benefits that a current municipality so that it can function in the ordinary course.” So you have to weigh these issues. The alpha and the omega. The young and the old. The past and the future. Promises made, promises can’t be kept. It’s a tough deal.
I never borrowed a dime from a pension fund. I never forgave a loan. I never forgave a defaulted loan and converted it to equity in a business that has no market value. I never deferred compensation or contributions to pension funds, we did that on $600 million we can’t pay. Never did any of it. So the issues that we’ve been talking about have been coming this way for 60 years. That’s the assessment and the plan design phase.
So we came up with a plan of adjustment. And even the nomenclature in bankruptcy is different. In restructuring it’s a plan of reorganization. In a chapter 9, in a municipal bankruptcy, it’s a plan of adjustment because by definition you’re trying to adjust the debts of the municipality. That is what the framers of the constitution and the bankruptcy code thought of when they were using the language to describe what we’re trying to do. A plan of adjustment, because principally what you’re trying to do is adjust debts because that’s what kills municipalities. Why is it important? We’re at a crossroads. Not to cast aspersions anywhere but cities have lives and deaths. Great city at one time is called Tombstone. One time Detroit was one of the four big cities in America. There was New York. There was Detroit. There was Chicago. And there was this little bitty town out on the edge of a desert called Los Angeles, okay, nobody real cared about. It was one of the great American cities. Great architecture. We have the same fountain at Belle Haven as the designer of the Supreme Court. Belle Isle was designed by James Olmstead, the landscape architect for Central Park in New York. A great city, the reason we have the Detroit Institute of Art is because when the city was wealthy not only would donors go abroad and buy art, the city bought art. Okay? Well, we’re not there right now, so what are we trying to do in the plan for adjustment? Four principal things. First and foremost, get the city to a point where it can provide the necessary and adequate level of services for its citizens. It is a shame in any municipality in America that it is dark and 40% of your lights are out, that 20% of your housing stock is down, this is America. We have a high standard of living and there should be a high standard of living throughout the country. Number two, provide for pensions. The promises that were made that weren’t kept. Number three, as required under statute 436, the state statute under which I operate because I’m a fiduciary in two capacities. I’m a state fiduciary under 436 and I’m a federal fiduciary under chapter 9. Okay? Provide for the city so it can go forward in a sustainable fashion so that we don’t have to come this way again. And here’s the catch, number four: to reach a consensual resolution with our stakeholders. Both on the labor side and on the credit side. So that’s the heavy lift. The state of affairs, the needs, the requirements for the state of the city are apparent. Nobody disputes it. Reaching a consensual resolution, and getting someone to understand that they have to give up expectations, particularly those in the twilight of life, that’s a difficult call.
So we go to plan implementation, stage three. Part of it is going through the mediation process which is led by Chief Judge Rosen from the Eastern District of Michigan, and part of it is overseen by Judge Rhodes, University of Michigan, Judge Rhodes. He’s got a hard job. He’s got to make decisions about proposals that I and my team make on a regular basis under the rubric of the bankruptcy code and determine whether it’s fair and equitable, whether there’s unfair discrimination, and whether or not whatever we propose will ultimately be feasible. Can it work? Okay. That’s in the implementation stage. We’ll be going through that process for the next six months, and it’s going to be a quick process because there’s no reason why it should not.
The world is finite. The problems, we’re not going to grow our revenue stream appreciably any time soon. That billion dollars in the general fund is not going to go to a billion five. The 700,000 people we have in the city we hope to grow, but it’s not going to go from 700,000 to 1.2 million in the next few years. It needs to grow. We have to assume a steady-state going forward. Okay? That’s just the state of affairs that we have to deal with.
So we have a disclosure statement hearing coming up and that’s whereby we’ll put a plan out which we hope to publish in the next few days, the final version. At that disclosure statement hearing the court will make a determination as a matter of law did we provide adequate information for an informed interested party to make a decision as to whether or not to vote for or against the plan. The date that we’re really going to have material coming up is in July, end of July, July 27 or so, we’ll start the confirmation hearing. That’s going to be a full-blown trial as to whether or not the assumptions we made, the proposals we put out, are adequate and feasible for the plan to be successful. After that the judge has got to take it up, go through all the evidence, and I expect it’s going to be a huge volume of testimony and evidence that the judge and his clerks have got to pour through to make a decision. And when you think about it, everybody involved in this process has a heavy job. The mediator is under tremendous pressure to reach a consensual resolution for the group of people that have enabled me to get the pensions to a level where I think I would not have had six months ago.
We’ve been pledged $365 million from a group of 10+ foundations. Some of whom, all of whom, have nothing to do with this process. Some of whom have been in the city for a better part of a decade, but some of whom have not. Ford Foundation, Knight-Rid(d)er, Skidder, uh, uh, Skillman, uh, you go on to Kresge, Kellogg, uh, Greater, uh, Southeast Michigan. $365 million. Over a third of a billion dollars, gratis. Some of them did that as a profile in courage. Some of their own board members said, “We do philanthropy, dollars that yield positive outcomes. We don’t do charity. We just don’t give money away.” Some of them said, “We shouldn’t be doing this at all. There’s a moral hazard here because after all we were told in 2005 and 2006 that that $1.44 billion was going to cure the pension underfunding problem. And if they’d taken that money and invested it in the Dow Jones Industrial Index or Standard & Poor’s from 2006-9, when the stock market was trading at 8500 to 9000, it’s now at 16300, it would have almost doubled their money and there’d be no pension underfunding. If they’d stopped some of the practices, the 13th check, declaration of self-funded rates of return in 2009, one of the funds lost 27%, they declared a rate of return of over 7%. 32% spread in one year. True story. Self-funding mandates.” So many people are saying there’s a moral hazard here. We shouldn’t be doing it. But in a profile in courage the leaders said, well, no, this is a particular time in the history of America and we need to stand up and be counted. And I thank them for that because otherwise I was going to be having a yard sale of DIA art. Okay? And if you don’t think that can happen there are many sovereign wealth, Russian oligarchs, Brazilian millionaires who were calling and inquiring about it. If I didn’t get that money I was getting proposals – multiple proposals a week – to turn Belle Island, Isle, into a gated community. One said, “Look, you don’t have to do the whole thing, just the north part where the golf course is. We’ll gate it off, turn it into a private community.” It’s a 1000 acres of prime land. Thousand acres at a 100,000 dollars an acre, a $100 million, the city needs money. Okay? So, we’re trying to preserve assets. We have the state coming in with a settlement of $350 million and I’m sure those of you who know this state, there are folks in the legislature who are saying, “Why?” you read it in the paper and read it on the blogs, “Why are we pouring money into Detroit? They made their bed, let them lie in it.” So, the state has said, “Look, we’re going to do this deal but we’re going to need a consensual agreement to get this deal done so we can get it through the legislature in time.” Then we have $100 million coming in from the DIA benefactor community. All told, from 2006 to now, 2.255 billion dollars will have been given to Detroit to address its pension issues. So when I say “sustainability” we can’t do this again. This is it. So we need consensual resolution.
So that’s where we are now. Getting prepared to start the court process and push out the final stage of our plan. I am hopeful that our counter-parties, particularly in the labor community, understand how crucial this is. There is a risk that if I don’t get their agreement some or all of this money could go away because it’s hinged – the condition precedent – that there be a consensual resolution to the claims in this bankruptcy. And that will severely impair the 94% I’m trying to pay to our uniforms and the 72% I’m trying to pay to civil service employees. Now, what’s at stake? If we get this right we’ve restricted the city’s balance sheet. But more importantly than that, there are things going on in the city right now that already show the interest and how quickly a city can turn. We have foreign investors from China who bought up three buildings in Detroit. They’re putting their money where their mouth is. One investor from Hong Kong, a very wealthy developer there, has bought up a number of properties along the East Jefferson Corridor and is looking at doing some development of an open use, public access building on Belle Isle. We have over seven projects going in on the Woodward Corridor. And just in the next two to three years Detroit will have four major infrastructure problems, projects, ongoing in the city. We’re so important to international trade that the sovereign nation of Canada will spend $5 billion to build us a bridge. We have a welcoming center going in. We have M1 light rail. We have a new arena going in that’s going to close the space between Downtown, Midtown and New Center. So that your sports center in Detroit is going to be one of the most foremost sports centers that will rival Three Rivers Stadium in Pittsburgh, if you’ve ever been there. Okay? We will be able to have event nights virtually year-round in the sports cycle and that will drive business and development throughout that area: restaurants, pubs, entertainment. The city is on the move. It’s got a lot of great things ahead of it, a lot of great interest and I can’t tell you how many financiers, the governor and I were just in New York yesterday talking to a slew of them. Spent time with several investment banks afterwards who said, “What can I do to help Detroit? How can I assist?” Even in the midst of bankruptcy we have lenders lining up to fund us for our quality of life loans so we can put services out and for exit financing when we get through bankruptcy. So I’m not saying it’s pollyannish, because at the end of the day it’s still a tale of two cities. Downtown, Midtown, New Center, thriving. 97% leased. A number of different activities. If you’re ever down there during an event night it is a thing of beauty. But a 139 square miles of city, 143 if you include rivers and lakes. Okay? Boston, Manhattan, and San Francisco fit within our borders. A city that was originally developed to be anywhere from 3 to 5 million people, at 700,000. Almost 3000 miles of sewer and water lines that have to be maintained, some in areas that may have one or two houses in block. So there are challenges.
I liken what I’m doing here to the first step in a very long path, or to use a metaphor, I’m the nettoyer, right? Someone had a party. They drank too much. They stayed too long. They partied too hard. They hung from the chandelier. They danced with the lampshade on their head. They trashed the joint. They walked out and left everything on the table. I’m coming in and cleaning the place up. Washing the dishes. Removing the tablecloth. Resetting the table. Rehanging the drapes. And mopping the floors. But the leadership team behind me, Mayor Duggan and the city council, think about this, are working together. Council passed privatization of solid waste, I never thought in my life I’d be so excited about garbage. Okay? Talking about public policy, I’m elated about garbage pickup. I wake up and drive around the city to see what garbage has been picked up. Okay? Also, custodial services, we clean up our buildings, but that’s the grist, the grist of urban management, public policies, making things work. Fixing potholes. Repairing 75 sewer line breaks in the first week of the month. I just had to be the emergency manager in the worst winter in a 130 years, last time they closed the university I was a sophomore in 1978. I hope I’m not causing all the problems. But trying to get to this so that a city truly dreams of better things rises from the ashes.
So I could prattle on and on about Detroit because I’m passionate about the city. Someone asked me on the anniversary, “What’s your biggest mistake?” My biggest mistake? I failed to appreciate the true grittiness and resilience of the people of Detroit. The city of Detroit – the municipality may be bankrupt – but the people of Detroit are not. The people of Detroit are resilient, they love their city and they want to fight for it to come back. And it will, because that’s the true nature of the American spirit. And I’m just proud and humble to be a small part of it and having been given this opportunity.
So that’s the end of my prepared comments. I had hoped, at the beginning of my speech, to exercise a point of personal privilege in public speaking, the five Bs – be brief, brother, be brief – but I’ve gone on for a while. So I’d be happy to answer any questions about what we’ve been doing, or anything else.
Thank you.
October 2012: “East Cleveland was once before put in a state of fiscal emergency – on Sept. 9, 1988. The city remained in that fiscal state for 17 years and four months before the emergency was lifted by the state on Feb. 4, 2006.”