July 18, 2015 was the second anniversary of the City of
Detroit's filing for bankruptcy. This action was taken by the
City's Emergency Manager Kevyn Orr, with the support of
Michigan's Governor Rick Snyder. But, with the exception of
Detroit's corporate leadership, it was fiercely resisted by
virtually all other interested parties, including political
leaders, public employees, holders of the City's debt
obligations as well as virtually all commentators in the media. Two
years later, it is clear that the steps taken during the bankruptcy
proceeding have provided a promising new beginning for this
once-great City and its people.
This bankruptcy culminated a long course of dramatic urban decline.
In the 1950s, Detroit was the fifth-largest city in the United
States, with a population of 1.85 million. It was America's
busiest port and the center of its most important manufacturing
industry. By 2000, however, Detroit's population had been cut
almost in half to 945,000. The de-industrialization of the Midwest,
driven by a struggling automotive industry, had pushed Detroit into
a spiral of decline, made worse by its often dysfunctional
political leadership.
By the early years of the 21st century, Detroit's condition had
become critical. The City was chronically short of cash, its tax
base had eroded, crime remained at high levels, fundamental public
services were failing, and infrastructure was crumbling from want
of maintenance. From 2000 to 2010, Detroit's reduced population
fell an additional 25 percent, from 945,000 to 711,000. With its
tax base departing and unemployment reaching record levels, tax
receipts plummeted.
Total City revenue declined by approximately 20 percent between
2008 and 2013. Raising taxes was not an option; the City was
already levying property taxes at or near all the statutory
ceilings imposed by Michigan law and had among the highest personal
income tax rates of any city in Michigan. Nearly one-third of
property owners stopped paying their taxes on real estate, which
had collapsed in value. And the City continued to lose those
taxpayers who could afford to leave.
Between 2008 and 2012, Detroit's spending exceeded its revenues
by an average of $100 million annually. By the time of the
bankruptcy, the City's deficit skyrocketed to $700 million.
Legacy costs—such as the City's commitments to provide
health care benefits to retirees and its obligation to fund its
pension obligations and to service its bond debt—absorbed 55
percent of Detroit's annual general fund budget in FY2014 and
were projected to balloon to 70 percent by FY2020. The continued
deterioration of increasingly underfunded city services and
infrastructure appeared unavoidable.
In the fall of 2012, the Governor impaneled a financial review team
to evaluate the City's financial situation. In February 2013,
after several dire interim reports, the review team reported that
Detroit was in imminent danger of financial collapse, recommended
that the Governor declare a "financial emergency," and
advised him to appoint an emergency manager for the City. On March
14, 2013, the Governor appointed Kevyn Orr as the City's
Emergency Manager.
The reaction to Mr. Orr's appointment was oftentimes
mean-spirited and personal. Some local and national civil rights
and political leaders—in addition to the predictable pundits
and talking heads—attacked his appointment as a racially
inspired effort to disenfranchise Detroit's voters and elected
officials. A characteristic trope was to liken Mr. Orr to a
plantation "overseer" with Governor Snyder as the
"master." The threats and invective targeted at Mr. Orr
personally required the State of Michigan to assign Mr. Orr two
security details, one to publicly escort him around the City and a
second plainclothes detail, unknown even to Mr. Orr himself, to
follow as a backup.
On the day of his appointment, Mr. Orr called his task the
"Olympics of Restructuring." This understated the
challenge. Mr. Orr's job was to restore financial health to a
hopelessly bankrupted city in the face of strident opposition from
an array of politically powerful creditors, including public
employee unions, retiree representatives, and large institutional
owners of the City's debt instruments. Precedent for
challenging the well-protected interests of such employees,
retirees, and debt holders was limited. Throughout the litigation,
Mr. Orr and his team of legal advisers, financial experts, and
restructuring consultants were routinely outnumbered in court and
opposed by sophisticated adversaries.
On top of this overwhelming legal challenge, Mr. Orr was required
to oversee the operations of the City in his role as Emergency
Manager. Remarkably, Mr. Orr was able to put in place several
important operational reforms that quickly improved basic services
for the City's residents. By privatizing trash collection, Mr.
Orr greatly improved the reliability of this fundamental service.
Over the objection of creditors, Mr. Orr found ways to provide
funds to Detroit's unfunded Public Lighting Authority, which
led to the installation of 30,000 new streetlights by the end of
2014. Through a combination of public and private funding, Mr. Orr
was able to reopen 160 city-owned parks that had been closed for
want of maintenance.
Perhaps most important, Mr. Orr was able to take steps that
dramatically improved the performance of Detroit's emergency
services, particularly its police force. Police response times for
high-priority calls improved from almost one hour to 16 minutes,
homicide closures improved from 11 percent to over 65 percent,
while reported burglaries and thefts declined 20 percent from 2013
to 2014.
The bankruptcy proceedings prosecuted by Mr. Orr have provided the
City with the means to build on these and other operational reforms
initiated during his tenure. Proceedings that could have taken
years were, remarkably, resolved in 16 months, largely because of a
dedicated and hardworking bankruptcy judge and the creative use of
mediations, in which a number of district court judges in the
Eastern District of Michigan sat as mediators. Through the
litigation and more than 150 mediations, Detroit's $18 billion
debt burden was reduced by approximately $7 billion, restoring the
City to financial solvency.
In remarks delivered from the bench at the conclusion of the
bankruptcy proceedings on November 7, 2014, Judge Rhodes recognized
Mr. Orr's singular contribution to the city:
Here I want to single out Kevyn Orr for special recognition and
appreciation. His task was perhaps the most challenging of all of
us. Yet he met that challenge with skill, determination and
commitment, and at great personal sacrifice. I hope that someday
soon, this City will recognize the singular contribution that he
made to its fresh start and give him the credit that he truly
deserves.
At a time of widespread pessimism about the state of civic affairs
in the United States, the example of Detroit is a reminder that
committed, competent individuals can make an enormous difference,
even in circumstances that are hostile and seemingly hopeless.
Detroit's bankruptcy is simply one step in its long-term
revitalization, but without the successful readjustment of the
City's debts, reorganization of its operations, restructuring
of its many financial obligations, preservation of its cultural
assets, and the patience and cooperation of its elected leaders and
citizenry, Detroit's future would have been bleak. Sadly,
because Mr. Orr's work as Emergency Manager turned out to be
such a success, it now receives little attention from the news
media, which can no longer find fault with his remarkable
achievement.
An edited version of this Commentary, titled
"2 years after filing, bankruptcy put Detroit on
track," was published in the Detroit Free
Press.
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