September 25, 2014 / 11:02 AM / 5 years ago

Emergency manager oversight to end soon for bankrupt Detroit

DETROIT, Sept 25 (Reuters) - Kevyn Orr will end his 18-month term as Detroit’s emergency manager this week, leaving a city still mired in operational and fiscal uncertainty and arguing in court for approval of its bankruptcy plan.

His widely anticipated removal by Detroit Mayor Mike Duggan and the nine-member city council - which could happen as soon as Thursday - would be the first ouster of an emergency manager under a 2012 Michigan law.

The city’s elected leaders have made clear they want their powers back once the clock stops ticking.

Orr is expected to continue as an outside adviser to the city, but his departure from the post and Detroit’s speedy run through the bankruptcy court so far are turning attention to Michigan’s emergency manager law.

Orr, a former corporate bankruptcy attorney at law firm Jones Day, famously took Michigan’s largest city to federal court in July 2013, filing the biggest municipal bankruptcy in U.S. history. He has spent the last 14 months pushing for a quick resolution of the complex and sometimes testy proceeding, knowing the clock was ticking on his ability to control the city and restructure its $18 billion of debt and other obligations.

The Local Fiscal Stability and Choice Act allowed for the installation of state-appointed managers in financially ailing cities and school districts for 18 months, boosted their powers and provided an avenue for municipal bankruptcy filings.

In addition to Detroit, there are 11 other Michigan municipalities and five school districts currently with some form of state-mandated oversight under the law. Detroit’s ability to remove its emergency manager after the 18 months called for in the law has been a driving force in the bankruptcy, raising concerns that the city may have been short changed in terms of restructuring efforts and creditor settlements.

“You can’t fix a city as dysfunctional as Detroit in 18 months, no way,” said Eric Scorsone, a Michigan State University economist, who has studied the law.

While the city’s fiscal management appears to be better, progress on improving city services is “maybe a third of the way there,” he added.

If Detroit officials vote to remove Orr, the law requires the city to reach a consent agreement with Michigan’s treasurer within 10 days. That document could spell out the transfer of Orr’s powers to the city’s elected mayor and city council, as well as operational plans.

“I think the next 12 months are probably really critical. It will tell us how well Detroit will follow this (bankruptcy) plan,” Scorsone said.

The city will have continued oversight from the court and from a state-created commission once it exits bankruptcy.

DETROIT AFTER ORR

Detroit officials have been meeting behind closed doors since Tuesday and are expected to give Orr a temporary role, allowing him to help shepherd the bankruptcy case to its end, which could come next month. And while the case will not be wrapped up with Orr at the city’s helm, its resolution would be relatively fast.

“He (Orr) and his team have managed to do what people at the offset said was unthinkable... to get to a plan which I expect will be confirmed in record time,” said Michael Sweet, a partner at law firm Fox Rothschild.

By contrast, it took Alabama’s Jefferson County two years to exit the bankruptcy it filed in November 2011. Stockton, California, filed its still-ongoing case in June 2012.

On Monday, a U.S. Bankruptcy Court hearing resumes to determine if the plan Orr and a slew of consultants and attorneys crafted to shed about $7 billion of Detroit’s $18 billion of debt is fair and feasible. The plan is now in its seventh revision at 1,111 pages.

Judge Steven Rhodes, who is overseeing the case, put the trial on hold starting Sept. 19 to give last major hold-out creditor Financial Guaranty Insurance Co time to retool its case.

WORKING THROUGH BANKRUPTCY

Since the trial began on Sept. 2, Orr has attended almost every session of the hearing before Judge Rhodes, often sitting at the front table with the city’s legal team led by Jones Day. Before that, for months, he spoke throughout Detroit, testified before the Michigan Legislature, and even spent some time in Washington, D.C., and on Wall Street to rally support for often untested moves, particularly concerning pensions.

Laura Bartell, a law professor at Wayne State University in Detroit, said Orr has proven to be bright, industrious and savvy, although there were stumbles along the way.

“He sometimes had a tin ear for the concerns of ordinary Detroiters. And he is no politician,” she said.

Orr released a restructuring proposal in June 2013 that called for minimal recoveries and drew howls of protest from most of the city’s creditors, including pension funds and bondholders. He followed up in January with the initial version of a debt adjustment plan that also sought to inflict great financial pain on creditors.

“He didn’t have any allies at that point and was certainly going to provide himself room to move on the numbers,” Bartell said. “That is part of the bankruptcy game.”

After court-ordered mediation, proposed recoveries increased, netting settlements with key city creditors. The biggest deal was the so-called “Grand Bargain,” which taps into a pot of money provided by foundations, the Detroit Institute of Arts and the state of Michigan to ease pension cuts and protect the museum’s collection from being sold to pay Detroit’s creditors.

An initially proposed cut of as much as 34 percent for retirees in Detroit’s general retirement system was reduced to 4.5 percent along with the elimination of cost-of-living adjustments.

For a factbox on the plan’s settlements: (Reporting by Karen Pierog and Lisa Lambert; Editing by David Greising and Ken Wills)

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