12.20.2013

Sharing Leadership. Motor City Mayor-elect Mike Duggan and Detroit Emergency Manager Kevyn Orr yesterday announced agreement on a power sharing agreement that could set a blueprint and precedent as the city seeks a return to self-governance and recovery from the largest municipal bankruptcy in the nation’s history. The agreement could be a stepping stone not only to any sustainable economic recovery, but also to a restoration of local control. The announcement provides a blueprint for how the transition back from state control to local control, or, as Mayor-elect Duggan stated: “The people of Detroit elected me to change the quality of life in their city. This agreement will allow the team I am assembling to impact city services that touch our residents every day.” Mr. Orr stated: “There is one goal and that is to create a strong, vibrant and solvent city and this agreement will help us achieve that,” Mr. Orr said in a statement. The announcement comes as Mr. Orr faces a late September deadline before the City Council can vote to remove him from office. The written agreement resulted from six weeks of discussions between Mr. Orr, Mayor-elect Duggan and their staffs, where the two men pledged to work closely. Under Michigan state law, Mr. Orr continues to hold final authority over city government and can reassume control if necessary. Since his appointment, Mr. Orr has run the city government virtually alone, without delegating much authority to the current mayor, Dave Bing, or the City Council.  Under the agreement, he will continue to manage the city’s overall financial operations, oversee federal grants, and maintain control of its Police Department. Mr. Duggan will be responsible for day-to-day operations, and will appoint non-civil-service positions in the executive branch of city government. He expects to concentrate on eradicating abandoned homes and blighted commercial areas, restoring streetlights that have been in disrepair, and improving the equipment and effectiveness of the city’s beleaguered fire department. Yesterday’s announcement could also help address the difficult, wary relationship between Mr. Orr and the city’s elected officials, community leaders and residents―who have viewed his one-man state takeover of Detroit as unfair and undemocratic. For the Mayor-elect, who takes office next month, yesterday’s announcement was his first opportunity to deliver on his campaign pledge to restore power to Detroit’s electorate. Moreover, as the first white mayor to be elected in Detroit in 40 years, the Mayor-elect took advantage of his changed leadership role to introduce what looks to be a racially diverse cabinet, headed by two prominent black officials: As deputy mayor, Mr. Duggan chose Isaiah McKinnon, a former Detroit police chief with deep ties in the city’s educational and religious communities. He also introduced Lisa Howze, a state legislator and former rival in the mayoral election, as his chief of staff.

The Fine Art of Trying to Recover from Bankruptcy. Detroit Emergency Manager Kevyn Orr yesterday released a final assessment from Auction house Christie’s of the Detroit Institute of Art’s world class collection—an assessment that valued DIA’s collection at between $454 million and $867 million―a hefty sum, albeit far less than the more than $2 billion estimate some city creditors have speculated the works are worth. Nevertheless, the extraordinary DIA collection is still considered one of the city’s most valuable assets―so, unsurprisingly, a potential sale or monetization of the collection has been one of the most controversial aspects of the city’s municipal bankruptcy case. Mr. Orr has repeatedly made clear that the art is on the table in the city’s restructuring. In fact, the issue of what role the invaluable collection could play in helping the Motor City out of bankruptcy and back to recovery has been an issue involving the federal judiciary, the State of Michigan, the Motor City, and pensioners—all eying with sugar plums dancing in their dreams what such a priceless collection could be used for if found in their stocking next week. Chief U.S. District Court Judge Gerald Rosen, whom U.S. Bankruptcy Judge Steven Rhodes had asked to serve as a mediator in Detroit’s bankruptcy negotiations, is trying to get private foundations to contribute up to $500 million toward a fund to protect the DIA’s city-purchased art from unsecured creditors trying to recover more than $11 billion owed by Detroit. Supporters of the idea say the fund could be used to help the city pay pensioners the estimated $3.5 billion they are owed. For his part, Michigan Governor Rick Snyder yesterday said that state financial support of a fund to rescue the Detroit Institute of Arts from a bankruptcy fire sale could help preserve the Institute and reduce the Motor City’s debts. Governor Snyder told the Detroit News: “I would say it’s much more likely that you could find an inclination of people to do that if was part of settling the whole (bankruptcy) case, if it really said this would wrap things up.” Gov. Snyder, however, cautioned that obtaining support from the state legislature to pledge state tax dollars toward the DIA would be “very challenging” if it’s perceived the money is being used for “paying debt,” warning there would be “a lot of terms and conditions.”  Nevertheless, the Governor said he was encouraged by Judge Rosen’s efforts to raise private funds to save the DIA art from a sale and to generate money for the city’s pension funds — the two most legally contentious issues of Detroit’s bankruptcy: “I think it’s great to have a mediator, people being innovative, being creative, trying to solve problems…I view it as how do you solve a problem? And how do make it so it’s not about people fighting or continuing to fight for years. If there’s a solution out there that people could live with, again, the question is can people come to a compromise that can viable that everybody can sign up for.” For interested readers, Christie’s assessments included: Pieter Bruegel the Elder’s painting, “The Wedding Dance,” valued between $100 million and $200 million, and Vincent van Gogh’s “Self Portrait with Straw Hat,” valued between $80 million and $150 million, Rembrandt’s “The Visitation,” between $50 million and $90 million, and Henri Mattisse’s “Le Guéridon,” at $40 million to $80 million. In its report to Mr. Orr, Christie’s also offered five alternate options instead of selling the venerable and world renowned art that that would allow the city to leverage cash from the collection while retaining ownership, including use of art as collateral for a loan; leasing the art to a partnership museum; creation of a “masterpiece trust;” sale and permanent loan or gift to the DIA; and a traveling exhibition. For its part, the DIA has fought against monetizing the collection. In a statement earlier this month, the DIA said the art should be off-limits because it’s held in a trust for the people of Detroit. Similarly, Michigan’s attorney general in the spring issued an opinion that the art would be off-limits even in a bankruptcy.

No Time for Dawdling. Yesterday, just one day after U.S. Bankruptcy Judge Steven Rhodes abruptly suspended hearings on Detroit’s proposed $350 million debtor-in-possession (DIP) financing and settlement with its interest-rate swap counterparties, Chief U.S. District Judge Gerald Rosen ordered the city and several groups to attend mediation talks on Christmas Eve in hopes of renegotiating an agreement to borrow $350 million and untangle a troubled debtor-in-possession or DIP deal blamed for plunging Detroit into bankruptcy. The federal court pressure and threat of coal in stockings is expected to intensify negotiations over the next few days between the city, banks, and bond insurers. Judge Rosen, who is leading the mediation talks, warned the city and others that failure to attend the Christmas Eve session “shall be grounds for the imposition of immediate sanctions, including entry of a default judgment.” Emergency Manager Kevyn Orr, who was ordered to attend the mediation sessions Monday and Tuesday, is seeking to use some of the money from the $350 million debtor-in-possession (DIP) financing and settlement with London-based investment bank Barclays to improve city services. Under Mr. Orr’s plan, Detroit would pay UBS and Bank of America about 75 cents on the dollar, while pensioners could get as little as 20 cents on the dollar. The suspended hearing before U.S. Judge Rhodes at the beginning of this week highlighted a soured loan deal ex-Mayor Kilpatrick’s administration used to pump $1.44 billion into the city’s pension funds in 2005 and 2006. The deal included a complicated interest rate swap that added $800 million to the Motor city’s pension debt, according to court records.

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