Detroit resurrected, p.1
Detroit Resurrected, page 1
To Kathryn
CONTENTS
Prologue: 4:06 p.m.
* * *
Introduction
CHAPTER 1 The Nerd
CHAPTER 2 Deal of the Year
CHAPTER 3 Kevyn Orr
CHAPTER 4 Project Debtwa
CHAPTER 5 Chapter 9
CHAPTER 6 Sacrosanct?
CHAPTER 7 Swaps Saga
CHAPTER 8 Pills Over Picasso
CHAPTER 9 You Can’t Eat Principles
CHAPTER 10 Haircuts
CHAPTER 11 Fixing the City
CHAPTER 12 “Get the Damn Buttons”
CHAPTER 13 The Empty Cabin
CHAPTER 14 One Bullet, Two Creditors
CHAPTER 15 The Rhodes Test
EPILOGUE
* * *
Acknowledgments
Note about Sources
Notes
Index
PROLOGUE: 4:06 P.M.
July 18, 2013, was a bad day for Bill Wertheimer’s 2005 Saturn Vue to overheat. The crossover vehicle lumbered westward on Interstate 96 in mid-Michigan, its overworked engine straining to make the ninety-mile trek from the Motor City to the state capital of Lansing.
As Wertheimer eased off the accelerator, United Auto Workers general counsel Mike Nicholson typed furiously on a laptop in the back seat, putting the finishing touches on a legal brief supporting an emergency effort to block the City of Detroit from filing the largest municipal bankruptcy in U.S. history.
The two labor attorneys—longtime friends who had marched in picket lines together and spent their careers fighting for union rights—were determined to undermine any attempt by the city to use a bankruptcy to cut benefits for retirees and active workers.
With two hundred thousand miles on the odometer, Wertheimer’s Vue sputtered along the pavement, the urgency of the moment unrecognized.
“We pay you enough—get a new fucking car!” Nicholson screamed.
Even for a city whose descent was half a century in the making, minutes still mattered.
Detroit emergency manager Kevyn Orr—who had been installed four months earlier by Michigan governor Rick Snyder as the all-powerful de facto CEO of the city’s government—was poised to thrust Detroit into Chapter 9 bankruptcy.
Orr, a Democrat, reported to the technocratic Republican governor. Not the City Council. Not the mayor. Elected officials had been rendered powerless under a controversial state law that allowed the governor to seize control of cities in fiscal chaos. The emergency manager had the authority to sever union contracts, dramatically overhaul city government, dispense of city assets, and control the budgeting process.
The son and grandson of African Methodist Episcopal ministers, Orr, a bankruptcy attorney before becoming emergency manager, spent the first several months of his appointment preaching the same sermon over and over: Detroit’s financial position is not sustainable, the government is broken, and the city’s neglected residents deserve better.
By now the strategy was set. Earlier in the week, Orr had requested the governor’s permission to file for bankruptcy and mapped out a plan to file the official documents with the court at 10:00 a.m. on Friday, July 19. Bill Nowling, Orr’s mustachioed senior advisor and spokesman, had even sketched a blueprint for a media blitz involving Orr and the governor immediately after the filing. They would barnstorm Michigan news media and the national press in an effort to define the bankruptcy filing as a fresh start for the city, rather than a dead end.
Attorneys for Jones Day, the city’s lead restructuring law firm, teed up the appropriate legal documents.
“Not uncommonly, when you’re preparing for a bankruptcy you circle a target date for a filing, and we did that here,” said Jones Day lawyer David Heiman, the city’s lead attorney in the case. “In Chapter 11, we call it a soft landing, so that you continue the operation of a corporation on the day you file as though there was no filing and everything continues to operate smoothly. That’s what you strive for.”
Wertheimer, Nicholson, and attorneys for the city’s two pension plans were hell-bent on injecting chaos into the equation by outmaneuvering the city’s legion of restructuring lawyers, consultants, and bankers before the case could begin. They seized the chance to blast a hole in Orr’s orderly plans around midday Thursday, July 18, when the Detroit Free Press reported on its website that a Chapter 9 bankruptcy filing could come at any time. They figured, correctly, that they had a limited window for a surprise attack. Fearing the prospect of unprecedented pension cuts—which Orr had already threatened to help balance Detroit’s books—the attorneys immediately devised plans to seek a temporary restraining order, or TRO, preventing the city from filing for bankruptcy.
Nicholson and Wertheimer jumped into the ramshackle Saturn Vue and set out from the UAW’s Solidarity House headquarters in Detroit—the same complex where, four years earlier, labor leaders had navigated the historic bankruptcies of General Motors and Chrysler—on a course to the Ingham County Circuit Court in Lansing.
When Nowling discovered that the Free Press was set to post a story, he alerted Orr. They headed to Cadillac Place, a palatial state government complex in Detroit that at one time had served as the headquarters of GM, to revise their game plan. They feared that after the Free Press story hit the Internet, it would prompt creditors to pursue a TRO to block the case.
“We were very nervous about it,” Heiman said. And for good reason. That’s exactly what the city’s opponents had set out to do.
With no knowledge of the efforts to block the filing, Orr and Nowling called Snyder and urged him to sign a letter immediately authorizing the filing on the assumption that creditors would act after reading about the city’s plans for Friday. But the governor resisted accelerating his timeline, embracing a methodical approach to the historic process despite a natural proclivity for expediency. “I’m committed to my process, and this is what we’re going to do,” Snyder, who had already been reviewing Orr’s request for about two days, said on the call.
Nicholson, who once directed the UAW’s efforts to protect workers in auto-supplier bankruptcies, knew that a bankruptcy could devastate vulnerable Detroit retirees and union members. Although the union’s direct involvement in Detroit city labor negotiations was minimal, UAW president Bob King had taken a special interest in the city’s plight and personally directed Nicholson to help fight pension cuts.
On their way to the courthouse, Wertheimer and Nicholson bounced ideas off each other, tweaking their emergency request and strategizing for their appearance before Ingham County Circuit Court judge Rosemarie Aquilina.
An ethical quandary quickly presented itself. They had no legal obligation to alert the City of Detroit or the governor’s Republican allies in the Michigan attorney general’s office to their sneak attack.
“Mike, do you think we should notify the state?” Wertheimer said.
Reluctant to relinquish the element of surprise, Nicholson nonetheless believed they had an ethical responsibility to say something.
“Yeah, Bill,” he told his friend. “It’s not in our interest, but I think we have to do that. That’s the right thing to do.”
They figured that as soon as they placed the call, Orr’s team of bankruptcy lawyers would devise a counterattack.
“We knew damn well what would happen,” Wertheimer said. “But we didn’t feel like we could be in front of Aquilina without giving them notice. We didn’t think we could do that ethically.”
The pair waited until about 3:35 p.m. before placing a call to alert the attorney general’s office that Aquilina would hold a hearing at 4:00 p.m.
Back in Detroit, Orr was initially unaware of the emergency hearing. He had spent the last several days fending off a steady barrage of lawsuits challenging his appointment, the potential bankruptcy, and the city’s decision to stop paying its unsecured debts.
Orr had concluded that rehabilitating Detroit without bankruptcy was impossible. He needed a U.S. Bankruptcy Court’s protection from the onslaught of lawsuits and creditors. Orr’s team had grown impatient at his efforts to entice retirees and financial creditors to reach settlements in lieu of bankruptcy.
“Their view was: ‘It’s nice you’re trying to do this Kumbaya thing and get everybody to work together. But it ain’t workin’, they ain’t listening, and you’re starting to lose momentum and the initiative,’ ” Orr said.
Even so, cities are creatures of state government. Federal bankruptcy law still requires cities to obtain state approval to file for Chapter 9.
Still unaware of the attempt to undermine his plans, Orr joined a preplanned conference call with Snyder in the three o’clock hour to discuss the course of events for the next day’s bankruptcy filing, even though the governor had not yet signed the authorization letter.
Suddenly, the door to the governor’s meeting room in Lansing burst open. Snyder’s lawyer, Mike Gadola, was panting. He caught his breath and spilled the news: Aquilina was poised to hold a hearing that could culminate in an order prohibiting Detroit from filing for bankruptcy.
“As your legal counsel,” Gadola told the governor, “I advise you to sign the authorization letter.”
Snyder, realizing he may have only had minutes to spare, decided he had thought about it enough. He grabbed a pen and signed the already drafted authorization letter approving the bankruptcy filing.
“We’ll fax it,” the governor’s advisors told Orr’s team over the phone.
Nowling sprinted from the emergency manager’s
He dashed off a frantic text message to Greg Tedder, the governor’s liaison to the emergency manager’s office: “I’m standing right by the fax machine.”
The liaison called. “They were concerned the fax machine didn’t have the right time stamp on it,” Tedder told Nowling.
Tedder scanned the document onto the governor’s computer and emailed it to Orr’s team with a verifiable digital time stamp of 3:47 p.m.
Nowling hurried back to Orr’s office and printed out the authorization letter. Orr signed it in a rush and called Heiman.
“Let’s file,” the emergency manager instructed.
With the pre-prepared bankruptcy filing in hand, Jones Day attorneys rushed to log onto the web filing system called Public Access to Court Electronic Records, commonly referred to as PACER. As they uploaded the digital documents, the antiquated recordkeeping system crashed.
“Unable to upload file,” PACER blared.
“We only filed sixteen pages, but something happened,” Heiman said.
Desperate for a solution, associates based at city hall stuffed hard copies into their briefcases and took off on foot for the federal courthouse, a few blocks away in downtown Detroit. At the Cadillac Place complex, attorneys furiously scrambled to reboot the system to take a second crack at an electronic filing.
Meanwhile, the attorney general’s office stalled, making a request for extra time to get to the hastily convened hearing in Lansing.
Several minutes passed. The judge and the attorneys waited.
Wertheimer and Nicholson had arrived with minutes to spare—no thanks to the Vue—having left Detroit so fast that Wertheimer had no time to change out of the jeans he was wearing.
“Excuse me, your honor,” Wertheimer said. “I apologize for my dress.”
“I don’t care how people are dressed,” Aquilina responded. “It’s more important that you are here.”
But 4:00 p.m. passed, and the state’s attorneys were nowhere to be found.
Minutes later, Thomas Quasarano, an assistant attorney general, entered the courthouse, and the hearing officially began at around 4:10 p.m.
It was too late for the objectors. Detroit’s bankruptcy filing had dribbled into PACER while the attorney general’s office stalled.
The official time of the filing: 4:06 p.m.
A law clerk dashed off a note to Aquilina, notifying her that the bankruptcy was official.
“Aquilina, of course, was pissed,” said Clark Hill lawyer Robert Gordon, lead attorney for the two pension funds that joined Nicholson and Wertheimer in the attempt to block the filing.
Federal bankruptcy law provides debtors a shield against lawsuits. The filing had rendered Aquilina powerless to stop the city’s Chapter 9 petition. “It was my intention to grant your request,” she told the objecting attorneys.
Heiman, the city’s attorney, was relieved. “I think our heart skipped a beat for a while there,” he recalled later.
At 4:06 p.m., July 18, 2013, Detroit hit rock bottom.
At 4:06 p.m., Detroit finally had hope.
On the city’s bankruptcy petition, moments before the filing was scanned and digitally submitted, someone had crossed out the “9” in “July 19” with a pen.
Orr had quickly scrawled “8,” bumping up the bankruptcy filing by a day and changing the course of Detroit’s future.
DETROIT RESURRECTED
INTRODUCTION
Everyone has an explanation for how Detroit went broke.
The contraction of the U.S. auto industry. White flight and the exodus of wealth that began in the 1950s. Discriminatory real estate practices. The 1967 riots. Regional political discord. Pervasive government corruption. A lack of corporate social responsibility. The destruction of black neighborhoods to make room for highways.
Former mayor Coleman Young. Former mayor Kwame Kilpatrick. Former president George W. Bush. Wall Street bankers. A dysfunctional mass transportation system. Shattered public schools. The disintegration of the job market.
Predatory lenders. The Great Recession. A collapse in home prices. Greedy unions. Democrats who were in bed with unions. Republicans who tried to kill unions. Republicans who were in bed with big business. Skyrocketing taxes. A failure to collect those taxes. Crime-ridden neighborhoods. Police brutality. Police lethargy. Drugs. Blight.
Neglectful City Council members. Hapless bureaucrats. Generous pensions. Gold-plated health care benefits. Overspending. An explosion of debt. A culture of denial.
There’s truth in all of these, and in their complex interplay. By 2013, Detroit was broke—and broken. The city government had morphed from a municipal services provider into a retiree benefits supplier, distributing about four out of every ten dollars from its budget to fund pensions, pay for retiree health care insurance, and service debt, most of which had been issued to pay retirees. Without drastic action, that figure would balloon to more than seven out of every ten dollars by 2020 and continue rising.
For decades, local politicians had tried quick fixes. In 1962, they enacted an income tax—and proceeded to raise it several times during the next half century. In 1971, they started taxing utility bills. In 1999, they passed a casino gambling tax. On numerous occasions, they hiked property tax rates until they reached the State of Michigan’s legal limits. But tax increases—which pummeled businesses, residents, and commuters alike—didn’t stave off the city’s financial collapse.
Coleman Young, who served from 1974 through 1994, slashed spending in the 1980s in an effort to stabilize the budget. Contrary to conventional wisdom, he had a conservative fiscal streak, spurning debt in favor of fiscal austerity. He laid off police officers and firefighters. He shuttered swimming pools, skating rinks, and even swim-mobiles, metal tanks filled with water that traveled from neighborhood to neighborhood giving kids a place to take a dip. Kwame Kilpatrick, who is now serving a decades-long sentence in a federal prison for racketeering, cut several thousand jobs to balance the city’s budget from 2002 through 2008.
Those job cuts, which had devastated basic services, provided temporary relief to the budget but ignored the fundamental source of Detroit’s debt crisis. With a severely contracting revenue base caused by population decline and industry disinvestment, the city could no longer afford benefits that so many other communities take for granted. The city allowed pension costs and retiree health care obligations to balloon. Instead of negotiating deals that Detroit could afford, unions repeatedly scored contracts that ignored the city’s fiscal reality: retiree benefits consumed the city’s budget, redirecting money away from public safety. At city hall, a cascading series of ineffective politicians—who lacked the will, foresight, or ability to make drastic changes—turned to Wall Street to foot the bill for their fiscal recklessness, choosing debt over the hard choices necessary to protect the people of Detroit and ensure the financial security of the city’s retirees.
By 2013, Detroit’s 688,000 residents—down from nearly two million at the city’s peak in the 1950s—faced a humanitarian crisis. Its retirees encountered an insolvent city that could no longer afford to meet its obligations. Most Detroit neighborhoods had devolved into a state of chaos that appeared bizarrely acceptable to the political establishment.
Shirley Lightsey, a 1951 graduate of Cass Tech High School in Detroit, worked for the city for three decades, retiring as a human resources manager in the Detroit Water and Sewerage Department. She was an eyewitness to the monumental collapse in the city’s finances and basic services and then, as president of the Detroit Retired City Employees Association, became an eyewitness to the fallout enveloping vulnerable pensioners.
“To have lived through the vibrant Detroit that I lived through and to see what has happened to it and to see the city come to this point without somebody stopping it before now,” she said, her voice trailing off. “People don’t realize. They’ve never seen a grand city. And we were a grand city. I was right in the middle of it. It was something to be proud of.”
