Orr: Balance books, improvements follow
1.Describe a typical day for you? Your interactions with Council, the mayor and consult-ants, the governor?
Average day starts with a series of calls/reports with various members of my team (finance team, legal team, actuarial benefits, labor) or press calls, that starts usually 7:30-8 (a.m.) Go to the office usually 8:30 -9(a.m.) 9:30-10 followed up by a number of meet-ings more calls. I get a daily cash report State of the City Daily Cash Pack is what we call it (revenue line, payments going out). I look over the daily cash pack and it tracks it on a two week spans as far as what we’re paying out actuals over projections. Then another series of meetings or calls, hopefully not depositions. I usually eat lunch at my desk I don’t go out that much. I’m trying to get a lot done in the day. And mostly meetings, calls, consultations…occasionally when the mediations are ongoing my team will step out and give me a call about an issue or a posit (p.m.)
(The Mayor and I) see each other every day but we have a standing Thursday meeting where we sit down and go over both what’s happening on his side of operations, my side of restructur-ing. With city council, it is probably as frequent though less structured, (I met with) council presi-dent, I have an open door policy with anyone at council. they have both my personal number and my (cell) phone. And they’re welcome to call me anytime day or night. Sometimes we’ll take calls either in the morning, at night, on the weekends. And we occasionally have a lunch, not all the council people just various individuals of council .
2. There’s a lot of controversy about the consultants. How do you monitor them? How do you choose them?
All of the city’s consultants with the exception of jones day were chosen when I was here. I recused my self, I think there was an email back in whenever this all, we did the pitch jan 29, I think the next day or two I recused myself from both the jones day pitch, but the jones day re-tention and then when I came to the city I recused myself from jones day retention as well. So all of the professionals were retained, if you go back and look at the nov. 2012 memorandum of Detroit reform, that had specific provisions to retain restructuring professionals who had been working in the city — this is all in the depositions — already throughout 2012 including Miller Buckfire, Investment Bank, Conway Mckenzie, restructuring professionals Ernst & Young, not our auditors, they are our accountants and forecasters, and then jones day. The city has since retained on behalf of the retiree committee a series of professionals for them. In fact, you saw this morning some of them were asking for six hundred and some odd thousand dollar what we call D&O, directors and officers insurance liability policy, which we rejected. In bankruptcy you’re entitled to get releases and what’s called exculpation people acting within their official duties in the firm. My contract with the state has a provision for D&O, liability insurance, health insurance, non of which I’ve obtained. frankly I think I’m trying to conduct this in a way that I don’t think there should be any …but I haven’t done those things. But we pay for the city, we pay for the retiree committee and the other …counsel.
3. Let’s talk about oversight because people are very concerned about that.
There are three-layers of oversight: I know this is skeptical to some people that the firms please themselves in fact all of the city’s restructuring teams have taken a discount on their mar-ket/average rates at least 10 percent, including conway, Jones Day and others. In addition to that they have to scrub their bills for any administrative costs. for instance a firm like jones day, as of last year had already written off about $4 million. And that preparing fee bill is doing other things that you would not bill the city for, so they have to manage that themselves. then it comes into the city and the chief financial officer’s office. But before it comes into the city the judge has appointed a fee examiner. In that process there’s a 15 percent holdback against the profession-als as for a final fee order that will come at the end. That person’s job is to review all the fees to make sure they are necessary and appropriate and consistent in what he sees happening in the bankruptcy case. So the bill that actually gets to the city is the full bill but it’s less the 15 percent holdback that the moderator has in place. That’s reviewed by the CFO’s office and the CFO’s office approves the bills. Since we now have a CFO, I do not approve the bills. I see them, I don’t review them personally.
4. What about (the firms’) performance:
I think considering the rulings we’ve been getting on a basis and what we have to do in bank-ruptcy that the performance of the firms is pretty significant and quite good.
I lost count at I think 18 lawsuits against me and the city. There is an appeal or a motion against anything we do. In fact, … they’re going to appeal the swaps settlement; they’re going to contest that. …. I’ve been doing this for 33 years. I’ve done this in both the private sector, with the federal government where I handled the Whitewater investigation for six years of the President both on the independent counsel (fisc) and independent counsel (star) when I was at the RTC.
I was involved in the Chrysler case which was with the Indiana pensioners and with the dealer network which was hard fought after. I think it’s fair to say that before I go here i’ve had a fair amount of experience in terms of restructuring professionals, not just in the nation but around the world … I’ve never seen a more litigious environment than I’ve seen in this case. There were depositions regarding what I had for lunch and they were wrong. I paid for it myself. Anything we do is going to be litigated and looked at and we have to meet that and we have to fight it. So I see the performance of my team in particular as being spectacular. We’re dealing with records and books and actuaries and finances that have been inaccurate for 30 years.
5. Emergency managers don’t have a very good track record in Michigan. How do you think about the role of emergency managers in general and for yourself?
My view of the role of past emergency manager is a receiver. Receivership has been going on since the English admiralty sent ships out. Since the Dutch masters were sending out…. When an enterprise is in trouble it’s put in a receivership. DC government which had Uncle Sam next door was put into receivership. New York was in a form of receivership. This is a receivership. So my view is the role of the emergency manager, what I have to do is staunch the flow, the hemorrhaging of money and debt. Relive the city of some obligations that it entered into years ago. I’ve never entered into a loan. I’ve never borrowed from a pension fund. I’ve never ap-proved borrowing 1.5 billion dollars in 2005 and 2006, which was really lent… Our annual fund budget is 1 billion. We borrowed 150 percent of what our general fund budget is in 2005 and 2006. That was supposed to cure pensions then. That was going to be the great cure all. So I’ve never seen a city in more difficult straits than where we are both long term and short term. And when you look at demographics, we’ve lost 40 percent of our population, 50 percent over the years. Financially our tax base is going down, our assessments are too high, we’re at the maxi-mum millage rate. Borrowings, our ratings are low. We borrowed 1.5 billion, we entered into swaps….
6. The emergency manager law puts you in charge of the entire city where you’re also responsible for the whole public side of the city. What are your thoughts around ac-countability, around public disclosure, transparency, I’m sure that’s part of the lawsuit strategy you face?
I think some of it is a part of the strategy. But accountability, I think the second or third day I got here I entered an ordered restoring compensation and salary to then City Council and Mayor Bing. And I also delegated to them, as I have with Mayor Duggan and his team, much of the or-dinary core city operations. So, I understand a lot of people have those concerns but I think I’ve been fairly consistent in trying to recognize those concerns. I got a lot of criticism. I think that was the first or second order I entered back in March was trying to restore the ordinary course of business for the city government and people pursued that. Permits were issued, people came to city government, garbage got picked up. I’ve been trying to be very observant of those opera-tions. And I did the same thing with Mayor Duggan, perhaps a little more robustly because we specified with greater specificity. So, as far as transparency and those things, frankly, on a day-to-day operational basis from the average citizen’s perspective that ordinary course process has been restored.
7. In coverage around the Mayor’s State of the City speech, there was a notice of the ab-sence of contention around budget issues because those all fall to you. Do you plan to release a city budget. is there a budget that we can look at that shows your priorities?
I adopted Mayor Bing’s budget. Remember we’re running on a fiscal year, so the budget will go to June of this year. That was through the ordinary budget process whereby the City Council adopted the budget. They sent it out to the Mayor. The Mayor made comments, he sent it to me. I adopted most of his comments. ..So, frankly on the operational side, the budget process, in fact right now we’re going through the budget conference process which we’ve reinstated, it was not done last year, we reinstated between city and operations. I coordinate closely with the mayor what we think the budget will be. I do have an obligation under (Public Act) 436 to report out a two-year budget and ten-year projections which I will do. But the budget process that the city is operating under is the budget that was approved by the prior mayor and that city council.
The two-year budget will come at the end of the case. And will come in relation to the restructur-ing to the city’s balance sheet at the end.
8. So something like the deal with Illitch, where does that fit? Are you thinking about the-se tax breaks as being something that you would re-imagine in the budget?
No. That is a deal that had been worked on for years before I got here. I did look into it. But it was my understanding that many of the agreements behind that deal had already been negoti-ated and signed. There was some discussion about additional agreements but that was at the 11th and three-quarter hour. So, I did not in my discretion under the statue think that it was ap-propriate for me to try to go in because there are a number of different things that come with that budget. There are bond issuances that go. There are purchasing commitments that have been made. There are agreements in principle that have been made. It’s not just the Illitch deal, it’s a bunch of other things specifically around that area around Midtown. So I let that go through the ordinary course and the City Council. I did not take it up. The City Council approved it. And I see no reason for me to second guess the City Council and go around it.
9. When you’re thinking about money in the future, what kind of income sources are you thinking about for the city?
The city has four main income sources: property tax, income tax, state revenue share, casino revenue/gaming tax. Those account for some where in the neighborhood of 75 or plus (percent) of the city’s general fund budget. It has other enterprise zones like DWSD, parking and some others, but that’s generally the general fund source. What we’re trying to do principally is stabi-lize, that’s the mayor’s plan, and reduce property taxes, invite people into the city to stabilize income taxes. Casino revenue is the whole swaps deal. We’re trying to relieve the liens that Bank of America and UBS has on casino revenue that the casinos gave in 2009. And then on state revenue share, it’s my understanding we get about 40 percent of the revenue share in the state. So it’s actually disproportionate, people say Detroit doesn’t get it’s fair share, it actually does.
(I’ve seen the Michigan Municipal League’s approach). I look at the numbers. I don’t look at ide-ology. Frankly everything I do, there are people who say there are things I do they take a differ-ent position with and I say that’s fine. I look at the balance sheet. With revenue sharing I hear about Gov. Engler’s commitment to increase two million dollars that never showed up, I’ve heard it all. I’m just looking at it here, people take different issues. I’m just looking at my numbers.
10. So you’re not looking at any new revenue sources (outside of the parking..). Is it fair to say you’re counting on growth in property and income tax by an increase in population?
An increase in population. An increase in collections. In some property taxes and income taxes, we’re only collecting 60-65 percent at best. We have to do a better job at that. Some fines and fees in collection, for instance the 36th District Court is over $240 million that’s due there. You’re not going to collect all of that, but you can make a better effort. Other communities, other coun-ties do a better job. Also, not just increase in city, but reducing expenses. Our legacy cost ex-penses were going to be in the neighborhood of 40 percent this year and by 2017 with pension obligation and healthcare it was going to balloon to about 67 percent. So we have to reduce the amount in the general fund which is really what the city has to work on. We have to reduce the amount of legacy obligations which include debt service. And that’s why some of the deals and some of the debt we’re trying to shed is so important because as a ratio even if we hold our in-come (consonant) at a billion if we can reduce the amount of debt we’ve raised our income. So with positive income, revenue raises by increased collections, rate of growth, perhaps, and this is up to the mayor and his development authority, tax increments,…TIFIA financing and things like that, but also reducing the debt obligation we have, you increase your relative rate of revenue.
11. What is your understanding of the Detroit Future City Plan? Are you aware of the crit-icisms and concerns of the plan?
Detroit Future City is trying to shrink the footprint of the city, which has real world consequences. For instance, if there’s one house on the block but you still have to flow power systems and maintain water and sewer systems and police it, then your cost as a percentage of the actual burden is high. To police huge swaths of city that is not densely populated that costs a lot of money. Detroit Future City seeks to shrink the footprint but it seeks to grow the population. And so when we say growth of population, growth of the city, it’s not growing the physical side of the city, that is going hopefully to reduce in some fashion that we can manage police and service. But it’s growing the population and therefore in market theory, population creates demand, de-mand creates cost increase, cost increase creates value and you grow the value of the property. So that’s the plan.
12. Some people can hear that as wanting a whiter, wealthier city. What do you think about that criticism? What kind of policy or programs are you thinking of that might pro-tect the people who are here living here now?
What I’m doing is race neutral. I’ve heard about issues of gentrification, or trendification or hippification. We have 139 miles of land. You’ve got roughly 7.5, 8 miles of it square downtown
Even if you were to to hippify or gentrify downtown on your basis, non people of color and hope-fully it’s not just white. Hopefully it’s diverse, Asians. You’ll have Chaldeans. The governor wants to invite immigration reform, so, you’ll have people of Hispanic descent. So hopefully, it’s not just white. In fact, in my hometown in Washington DC, you’ve seen a diverse group grow into the city, including Ethiopians, Somalians, Eritreans, Russians and others. We have to think just be-yond binary. What that does do, and people have been critical of this, it creates a certain ….And I saw this in Miami when I moved back in 83, and in 81 and 82 there were race riots and people were saying Miami was dead as we know it. That’s not true, it’s thriving. It happened in Wash-ington DC where when I moved there in 91 it was still burned out in the 7th and 9th Street corri-dor going up from the 68 riots. And people were saying all the white kids were going to move over to Arlington and out into Chevy Chase and never come into DC. Wrong. Places that were high crime districts, people now go to and they are thriving and they are diverse. And people of color and white people are moving back into the city. In the City of Detroit that’s 83 percent Afri-can American, the concern that somehow you can change the demographics of that city in any period of time materially is probably unlikely.
What you can do is increase the value to all residents and it may start downtown as is happening here. We’re 97 percent leased in the Central Business District. They’re seven different projects for housing going up in that district. But in terms of what I have to do in straightening out the balance sheet, my role is entirely race neutral.
Cities do five things: public safety, public works, planning and zoning, finance and administration, taxes and collection, and parks and recreations. Those are the core functions of any mu-nicipality. I’ve talked to urban planners around this. Planning and zoning is a huge function. This city has some of greatest opportunities, we’re a riverfront city that has not in my opinion exploit-ed the river as much as we could. San Antonio is in a desert, they’ve got a river walk. So, there’s plenty of opportunity to spread that out … and include more diverse, and if you want affordable housing, mixed use, other developments. Those are long term projects. My goal in the next seven months is to balance this ledger.
13. (New York Mayor) DeBlasio just had this big fight over affordable housing.You don’t see (affordable housing) as part of your role around what’s happening with Illitch and the displacement there?
Even if I wanted to, I’m not going to build that in the next seven months.
14. You make a distinction between the finance side and the mayor’s side (over opera-tions). How do you see the police department in that (having Chief Craig answer to only you)?
Yeah, he’s under me. There’s a reason for that. Some people expressed concerns that the Chief reports to me. People have to understand that the charter reform that was taken up in 2012, even if you go back to the regular order Chapter 7-313, the police reports and is supervised by the Commission. The Commission is involved in policy; they’re involved in discipline. So, people have an image, we have a strong mayor system of government but even when you go back to the ordinary course, the mayor’s primary function with the chief of police is that he serves at the pleasure of the chief, and the mayor gets to appoint four members of the 11-member Commission but the chief reports to the City through the Commission. Secondly, when I came in, the police department … some of the prior chiefs had engaged in inappropriate behavior. They’d had five chiefs in six years, some of it quite scandalous. My goal and my commitment to the chief to get him here from Cincinnati were he had did a fairly recognized excellent job was to give him the authority and responsibility he needed to the restructure department, as I was restructuring the city’s balance sheet. And that’s why he reports to me and he’s done a good job with that. Crime is down double digits. Violent crime, homicide, murder and it’s not just playing with the facts, we’re using Comstat now which is a pretty universe accepted statistical measure for police forces for the first time in the city’s history so we can compare apples to apples with other cities you get real statistics. We are driving response rates down. We’re getting new equipment. The chief is dedicated to making sure this is a state of the art department within the United States of America that focuses on the number one thing that I heard when I first got here, which is crime in the city.
15. What’s your relationship to the Commission? How often are you meeting with (the Chief)?
I meet with him weekly. I get daily reports. And if there are any special event, he will call me, he will call me at night as a matter of fact, late in the night. So we speak regularly. The Commission, under my order, I also suspended the authority of the Commission over the place to give the chief all authority and let the rank-and-file know that this guy is going to restructure the de-partment. When we talk about the steps he’s taken, he has raised morale fairly significantly. As a matter of fact I met with POA and LSA yesterday, He has widely been regarded as a breath of fresh air and a straight shooter in the department that needed it. So that will continue through my tenure. It will not continue indefinitely. As I have said before, there’s an appropriate time and we will go back to the ordinary order including the role of the Commission.
16. Why is that specific function is under you?
The rationale is to make sure that the chief had the authority to restructure the department. For instance, many of the supervisory roles were roles that were still held over from Mayor Kilpat-rick’s days. I was told by officers in the department — these are lieutenants, and sergeants who told me — that there are certain officers in the department who were Kilpatrick appointees and should not have been appointed. And I wanted him to have the authority to restructure. Not just for that, but to restructure the department, bring a sense of morale, create amongst the rank-and-file a belief that the department is moving to a meritocracy where everybody including those who are line officers have the opportunity for a promotion without — what I had been told was — a system where it depended on more of who you knew than how you behaved.
17.What do you think about the banks? You never mention any culpability, a major dif-ference between you and those who are more critical.
There is no lack of critics of the banks, both at a philosophical level and at a more substantive level. I do mention the banks. I mention the banks…I just said we have to relieve ourselves of the grievous debt. So actually I do mention the banks quite often. That the debt service and that the rankings that we have as a city is not sustainable and that pretty soon our numbers will balloon to legacy cost, meaning as I said today, legacy cost for debt service will be unsustainable. There are two schools of thought: There’s my school that looks at the balance sheet and says, “We can’t pay you what we agreed to pay you.” And there are some people who think you should be able to take 1.5 billion dollars and walk away from it. And we’re suing on the COPs. We’re suing to invalidate the COPs. Now, I will tell you to the people in the banking community when I go to New York and speak to them — and you read about it in Bondbuyer, Wallstreet Journal, any of the other groups — this is an anathema to them. The socialists will tell me that I’m a fascist that’s trying to undermine democracy as we know it and the bankers are telling me that I’m a communist that doesn’t believe in the rule of law and people agreeing with the (documents) they’ve agreed to. So I do mention the banks. But what I would say about that is my view is very rational, logical, I’m trying to restructure the city’s balance sheet on a basis that it can operate without destroying its ability to go to the capital markets for funding that it will need. You talk about affordable housing. You can’t pay that out of cash, you have to have bond issues, you have to have financing. You have to have loan guarantees say from the federal government. You have to have a credit rating. In today’s society, the one thing you have to be able to do when we get out of all this is to be underwriteable and be financeable. So I’m trying to do a very careful balance. And the people that people may not like, people may hate the fact that we live in a capitalist society and may think that we shouldn’t be able to charge interest but the reality is that is the way 50 states in the country of 310 million (people) and thousands of municipalities and counties finance their operations, whether it’s sewers, conduits, water lines, and we have to leave the city in a position and an ability where it can function with a better credit rating and with better access to capital market. So the growth that we’ve talked about, the access to capital and the ability to have affordable housing is something the city can plan for and actually achieve.
18. When the judge sent you back twice with the offer to Bank of America, what was that about?
I think the judge felt that the deals we had cut at arms length weren’t good enough. He is the judge and certainly it is helpful to have the decision-maker basically tell you and your counter party you’ve got to make a better deal. That certainly enhanced the ability of the city to go back to those parties and pursue a yet still better deal. Without getting too far because we’re still in front of the judge, we’re still in front of the court, that has yielded a benefit for the city.
19. You say you want to get Detroit out of the Dark Ages technologically. This is a poor city, facing evictions, shut offs. How do you think about that? You have an extraordinary opportunity to intervene in some of the worst of the city. Do you see yourself doing any of that?
I do and I don’t. Detroit has got to understand several things. Back in the 20s and 30s we were the Silicon Valley of the United States. If you were an engineer, an electrician or something like that you came to Detroit. We produced the bounty not just for America but we basically created the free world cause we put out the instruments that were necessary during World War II. What I would say to that is Detroit has to recognize you’re not just in competition with Chattanooga or Birmingham, you’re in competition with Mumbai, you’re in competition with Malaysia, you’re in competition with Dusseldorf and if you don’t modernize and put yourself in a position where you can attract not just residents but attract businesses and capital, you’re gonna see that capital flight. I met with a German auto executive talking about Volkswagen’s decision to go south. He said one of the reasons they didn’t want to come to Detroit because they viewed it as a conflict environment. So they took thousands of jobs from the city, not just Detroit, but the metropolitan surrounding area. They took thousands of jobs because that’s their impression. In order for us to be more efficient, reduce our cost, we have to have technology. I had a technology meeting this morning, we’re seven updates down in some technological requirements. Our new CIO came from Louisville, Kentucky, (he) will tell you we are well behind where we should be. In order for us to drive the efficiency of the city, we’ve got to modernize.
20. What about the people side of it. For example, the city until recently had a moratorium on turning off heat from October to April, that appears to have evaporated and there’s no central leadership saying let’s go back to that. We’re having evictions of mothers and children. Our major churches can’t make it through this winter. DTE is sending thou-sands of dollars in bills to people. And you have some power now.
I don’t necessarily have power to stop evictions. That’s between landlords and tenants. That’s sort of …beyond the scope of what I have to do. In terms of what you would call social safety net issues … certain power companies like DTE have hardship funds that people can contribute to but the broad sort of social safety net issues you’re talking about those are within the purview of the ordinary course of the city. I will say this from my prospective many of the operations the city engaged in for years and years people can make an argument for the 13th check. It gives people money at a time they most need it to celebrate the holiday season and also to pay for heating. But it ruined the pension fund. So my question would be to people, who would say that, I’d ask them, “Do you want to continue to engage in practices that ultimately come home to roost and ruin your financial viability going forward, or do you want to address some of those practices so that won’t happen?” You can continue doing what you’re doing, but then a city of 700 thousand can go to a city of 550 (thousand).
21. Some people think going to 550 (thousand) will happen if this pension cut goes through. Are you assessing what will happen if people go from $19,000 to $12,000.
The majority of pensioners don’t live in city of Detroit. In fact, many of them live outside of the state of Michigan, first of all. So I heard on a radio show the other day someone said, “Oh, we’re gonna to cut 200,000 pensioners.” There are 9,300 employees and they’re 20,000 retirees and they’re 700,000 residents … so let’s just deal with the facts. There are not 200,000 pensioners. Secondly, the majority don’t live here. The majority of people in this city (when asked) …
crime, public transportation and services. Even against that backdrop, we have tried to be very careful with pensions. My plan could have said, “We’re going to assess the fair market value of both the general services pension fund and police and fire pension fund and then everybody’s pension will be dependent upon that fair market value. There are a lot of people in other quarters who say that’s what’s fair… If they’d taken that 1.5 billion in 2005 and put it in Standard & Poor’s index over the past x number of years, they would have more than enough money to pay those pensions out. But they didn’t. Thirty percent of the funds that were invested in GRS, were invested in private equity, real estate, direct investment for which they received no professional pension advice. Tens of millions, if not hundreds of millions of dollars have gone missing. So when Judge Rosen came in with his funds that helped us rationalize the fund. And what we pro-posed in police and fire, is that we would pay 94 percent of what they’re owed. I’ve never been involved in any restructuring — bankruptcy, out of court or any claim against 94 percent. And for the general services fund what we proposed is to pay them 72 percent of what they’re owed, but also to have part of the state’s contribution act as a social safety net so that 138 percent of the poverty level will be the cutoff for any pensions. So when people hear pensions that we’re going to drive people into poverty, we tried very carefully not to do that. I’ve done that at some risk. As I said before, my plan as a differential between what we’re paying unsecured creditors, as you said we’re not hitting the banks, I’m taking away 80 percent from the banks. I’m paying them 20 cents on the dollar and they’re livid. They’re going to sue, they’re going to appeal. They’re going to go to Supreme Court. They’re going to talk about impairment of contract. They’re going to talk about 5th Amendment Constitutional taking. I’ll tell you what they’re going to do, they’re going to try to defeat this plan cause they’re view is they’d rather take that money. And I’ve tried to restore it.
22. If funds can be allocated to address the material blight. Why can’t their be funds to address the human side of what’s occurring in Detroit?
On the balance sheet side. If we make the balance sheet work for the city and we can get the buses running on time that means that citizens can get to their jobs on time, which helps facilitate their economic viability as opposed to getting docked for pay, having to miss a bus, not getting in and picking up their kid late from school, especially in the winter months when it’s dark outside. Those are very human things. So one, just for example, the financial aspect has a direct relationship. Safety and security, that means people like my mother, an 83-year-old can come up at their house when the door is banged open and feel that the police can hear the sirens on the way, as opposed to saying, “I’ve got to wait for an hour and a half because nobody’s coming. Number two, if we’re able to relieve some of the debt service so that we can deal with the city’s functions. And the city gets over 300 million dollars in federal grants. CDBG funding, section 108 for housing, we get hardest hit funds, NSP funds. We get a number of different programs. You’ll then have the ability that people will not historically…and those funds have been goofy in past years, mayors have used them and city councils have used them perhaps inappropriately.
One of the things we did last year is we took out the funds for IPH which was the healthcare system and put them into a separate organization so they’d have a dedicated fund to be able to get those services out. If you’re able to relieve the city of some of these financial obligations, you’ll have more ability to use grant funding to deal with some of those human issues. And in particular, CDBG, in terms of HUD funding is more flexible than any others. If you have people getting their lights cut off and other things there’s flexibility within the funding regiment to ad-dress those human interest dimension issues, including infant mortality, low-infant birth rate, early childhood education, secondary education, all those things, if you’re able to get the balance sheet right, it all flows from that. And finally, the third thing is at some point, I’ve got to return the city back to the regular order and that’s why I delegated authority because I wanted people to get used to regular order. I recognize this is exceptional, it’s traumatic. People are embarrassed. They’re upset. They view it as a deprivation of democracy. All this other kind of stuff. But it’s not. It’s a receivership for a year and a half to deal with issues that have been coming here for 60 years. If we’re able to do that, you will then have a mayor and a city council that have the best balance sheet that a mayor has had in 50 years. And some of the very issues that you’re concerned about are going to have to be addressed by your elected leaders cause that’s their job.
23. Are you aware of the history of Christie’s in the scandal with DIA patron Al Taubman and Sotherby’s conspiring to underprice/value the art? What’s to stop them from doing this again?
The price fix is what you’re talking about. Christie’s did not have to plead. But there are two houses in the world that do this work. Sotherby’s and Christies. Christie’s is about two and a half times larger as Sotherby’s. We got the best organization. I originally had them come in April.And then I pushed them away because it was so volatile. And what I said for nine months is DIA has gotta find a way to save itself otherwise we were going to be selling art. And as a fiduciary, under (PA) 436 and Chapter 9, I had an obligation to account for all the assets of the city and the reality is the city only had a few assets that had any real value. It wasn’t Coleman Young Airport, it wasn’t city-owned buildings, city-owned land. It wasn’t parking. It was DWSD. It was DIA and it was Belle Isle, which was a park. I was getting weekly on average five proposals to develop Belle Isle into a gated community. They wanted to take the north end where the golf course is, wall it off and use the casino as a country club. You guys think you’re angry with me know, imagine what it would have been like if I said this is going to be an enclave, another sundown city for the wealthy. So I said let’s get that off the table. Because otherwise that’s a thousand acres of pristine land, remarkably historical … let’s protect it. The same thing with DIA. I kept saying they’re going to have to find a way to protect themselves or I am going to have to take it up. Fortunately, I think they did. They went out and found roughly $820 million. That’s never been done before, $350 (million) for the state settlement, $100 million from DIA benefactors and $350-365 million from foundations some of whom have board members who are cautioning them against a moral hazard of making that contribution. And some of those very board members are hearing from some of our creditors who say don’t you dare do it, let’s force them to sell all the assets of the city.
So Darren Walker at Ford led this group of people, and Rip Rapson and others, led them to save the art, it was also to provide for the pensions. So when you say there’s a human dimension, pensions, returning the city to regular order, structuring our grants funding so that it operates. We lost an excess of $30 million in grants that we turned back in prior years, just because we weren’t managing them appropriately. And the past year, we got $27 million of our 2012 funds and $35 million of our 2013 funds just because we started to run our grants program appropriately. That is money that can be used for the human dimension.
There are 66,000 pieces, 36,000 are actually owned out right, there are 2500 that have been shown and 400 of those are the most valuable that have been appraised. That 400, five percent accounts for 90 percent of the value. Of the other 66,000 pieces, some of it’s broken jars and stuff people have never seen and has no value on the market place. So the vast majority of the value of the art has been appraised.
24. Are these assets — Belle Isle, DWSD, DIA being leveraged in the best possible way, getting the best value out of them? Would you reconsider any of these potential deals that you’ve put in your plan?
No, I’ll tell you why. Let’s take Belle Isle for instance, I have heard from more people….I under-stand the history of Belle Isle more than a lot of people in the city of Detroit, I understand Detroit. I don’t think anyone would have wanted me to have a hand in making that an exclusive enclave — even a portion of it — for the wealthy. Could I have done that? I could have sold it. I could have sold a hundred thousand waterfront acres to a Russian oligarch, a Brazilian millionaire, Saudi prince, whoever. Let’s say waterfront on average goes for $250,000 a quarter acre. So I could have sold a hundred thousand acres at a bid of a million dollars an acre. That would have raised a lot of money. But I didn’t.
Right now, as we’ve reported, there is a Hong Kong developer who has bought property on the other side of the island that’s looking to develop a hotel, either at the casino or the boathouse. The conditions I would like to see imposed is that it’s open to the public, and it’s accessible but there be an investment in order to enhance those amenities on that island as a destination (for) weddings, family reunions, cotillions, whatever you want, so that you now have this jewel that’s actually attractive for people to come and use. So we are considering those. But the main thing was to preserve one of the jewels of the city that (was) long fought after.
Let’s look at DWSD. Could I raise more money by going to someone like KKR or McCory and say I’m going to sell the water department. And they’d say, sure we’ll give you x number hun-dreds of millions and billions of dollars for it. What would happen? Three things would happen. One, I’d lose my tax exempt status. I wouldn’t be able to have tax exempt bonds and sell them at a higher rate. I wouldn’t be able to get tax exempt financing from EPA for capital improvements through the SRF funding program. So, now I’d be in the market. So number two, if I sell it to a private operator they have to create a rate of return for their shareholders over and above other investments. So what does that do? Number three, rate pressures. They’d now have to actually have market base rates that raise rates for the very people that you say we should be concerned about and who are already getting their water turned off. What would happen if the rate when up? So, could I have done that? Sure. Probably would have generated more money but look at the hardship it would have caused.
I could get out of here and ride out of town and leave you with a private operator that would in-crease rates and perhaps your customers who account for 65-75 percent of your revenue stream — Oakland, Macomb, Wayne County — have your customers start looking at Karegnondi (Water Authority), KWA as an alternative. Karegnondi and Genesee are building their own water department now trying to move away from DWSD. That’s not a short-term issue because it’s going to take them a long time and after all, all the pipes and sewers that run into Oakland belong to DWSD. But it would encourage them to leave you so that you would be left with a water department that only has 35 percent of its revenue stream coming from the city. You wouldn’t be able to run it. You know what would happen? You would become a customer of KWA, subject to their rate pressures. So, I have to think beyond just the immediate compensa-tion even though I’m just here for 18 months. I am truly trying to think in ways that do not leave the city vulnerable for things that will happen in 5-10 years down the road.
And that’s why I wanted to do Belle Isle. That’s why we’re looking at rationalizing DWSD. That’s why when we look at other city operations, the one post guard I’ve had in this whole effort is … we’re going to follow the facts, we’re going to look at the data and we’re going to try to develop plans that provide the best and highest long-term benefit to the city….
Everybody thought I was going to come in here and just start selling everything at sale prices.
And I’ve heard from a lot of bidders. I get letters everyday from people around the world who say, I’ll give you this for that. There are people lined up overseas who buy art …they would bid, you don’t want that. Hopefully, you may not appreciate this now. But 2,3,5 years from now when the city starts to comes back you don’t want to have the city to de denuded of all its assets. New York city didn’t have to sell Central Park …and they were in much worse shape. Chicago is struggling with 19 billion dollars in underfunded assets. MSN Money had a story about New York, Chicago and LA that combined have unfunded pension liabilities in excess of 60 billion dollars. We’re really trying to do this in a way that provides for the pensioners.
I could have said, OK, pensioners you have to report on every loan that you’ve made the Shelby Hotel. What’s the status, what’s the real market value, not the book value that you’re carrying on the books? What have you done to collect on it? And for every dollar you haven’t collected, I’m going to deduct that from my offer because you can go get that money from some place else. We could have played a hat game and we haven’t done that. I’ve really tried to be fair to the pensioners. I’ve tried to give our creditors some recovery in the case so that they will still con-tinue to do business with the city in years to come. And I’ve tried to prepare a plan that in the out years going out will allow the city to grow and provide the services that it needs, while at the same time not denuding the city of everything so that it’s been a fire sale.
25. What specific targets need to be met for you to feel that your role as EM has been a success?
I would like to see the city grow at the projected rate that we have because that means whatever efforts we did have attracted people to come in . I would like to see the city develop a culture that it learns to live within its budget. No more of the hat tricks. The city borrowed from the pen-sion funds, we owe them over $600 million. That the city operates on an ordinary basis…. I’d like to see there be an appreciable recognition of enhancement in services. The garbage con-tract that we privatized to actually clean up the city. Mounds of bulk garbage start to disappear. The blight funding, actually start taking down houses on the 94 corridor…Finally, I’d like to see that the residents of the city begin to believe in their city and as much pride as they have in their city be matched in as much productivity and performance that they have in their city. And just like Miami that was written off in the earlies and Washington DC that was written off in the 90s, that the story of Detroit is that it does rise from the ashes just like those other cities and its comeback is just as strong as those other communities. Washington DC has a 1.5 billion dollar surplus. Twenty years ago, there were places you wouldn’t even go into. It can happen. I’ve seen it happen in other places. There’s no reason Detroit shouldn’t have that opportunity.
26. In your U of M speech, you said one of the things you were worried about was civil unrest? Where are you on that thinking because that’s the concern that a lot of people have?
I got by that in week 4. I’m glad to say that I was wrong. Because I recognized that during Mayor Kilpatrick’s trial there was a lot of animosity. When I first came in there were people in the street. And I didn’t want, not so much for me I’ve been in controversial situations before. I didn’t want that to be the, (some members) of the press were looking for that story — they thrive on it. I did not want that to be the face of Detroit as a result of this effort. Instead, what I wanted it to be is what we’re seeing now, “Hey, these guys might get this done. This might be an opportunity. Maybe I’ll want to go look and invest….”
27. What’s going to happen when you leave. Will you go back to Jones Day?
I’m going to take some time off, spend time with my family. I really don’t know what I’m going to do. What I’m more concerned about is I made an offer that’s a great offer. I’m very concerned that it’s going to slip away. What I stay up at night about is an unprecedented effort to give this city 820 million dollars is going to bleed off a little bit. I don’t want to lose a dime of that money. So I want my stakeholders to come in — I know this is hard to their rank and file they’re upset. But the alternative is tragic.
28. Has there been any other provisions you’ve directly suspended in the charter. Do you plan to change anything else before you leave?
I don’t know. I know there are things I can make recommendations to the governor about further charter reform….There may be things I can do. I think under the statue, I can build into an order a year, and I may do some of those things to protect the financial projections that we have and to make sure that the sort of change and behavior take because we’re talking about changing what the city has done. I may try to do those things but I haven’t thought about it any more than that. I’m trying to get through this plan deal.