January 31, 2020
Good Morning! In this morning’s eBlog, we consider the ongoing fiscal and physical recovery of Detroit from the largest municipal bankruptcy in U.S. history, before assessing the status of the quasi-municipal bankruptcy in the U.S. Territory of Puerto Rico.
The Railroad of Recovery. On Detroit’s first day of chapter 9 municipal bankruptcy, the clerk at the front desk of the hotel I had just spent the night in warned that it was too dangerous for me to even consider walking to the Governor’s downtown office—this on the day the Motor City filed for the largest chapter 9 municipal bankruptcy in U.S. history. Yet walk I did—a depressing walk through and past abandoned buildings and empty streets, over to Detroit’s former main train station, an abandoned architectural masterpiece appropriate to a city with the world renowned Detroit Institute of Arts, which has one of the largest and most significant art collections in the U.S. The empty train station, designed in the Beaux-Arts style by the same architects who created Grand Central Terminal in New York, has tall columns and vaulted ceilings which offer a hint of its past glory—but which, then—and still today, crumbling, empty of trains and passengers, adorned with graffiti and gaping holes through which sleet, rain, and snow can fall. Mayor Mike Duggan noted: “Michigan Central Station has long been a symbol of Detroit’s vibrancy, and then it became an international symbol of decline.”
But, courtesy of the Ford Motor Company, the station could become a centerpiece of the city’s extraordinary fiscal and physical recovery—one which is projected to transform the station, as well as an adjacent book depository, brass factory, and hosiery factory into a 1.2 million-square-foot transportation innovation district. Moreover, Ford is planning to lease space to companies working on mobility and transportation projects, such as smart vehicles, infrastructure, and parking: the innovation hub will also have shops, restaurants, art, and performance spaces as well as what I could barely find on that first day of bankruptcy: a boutique hotel on the top floors of the 15-story tower rising above the station. Thus, it appears the revitalized station could well be the centerpiece of a profound city core transformation.
Detroit’s plan of debt adjustment designed by then Emergency Manager Kevyn Orr, was, on that first morning, focused on vital public safety: making sure street and traffic lights worked, and 9-1-1 calls received immediate responses. The task in a rare city more dependent upon income than property taxes was how to incentivize families to move into the city.
Thus, both the plan of debt adjustment—with the marvelous adjustment to retain the world-renowned Detroit Institute of Art, as well as the imaginative and extraordinary insights and financial investments of Detroit billionaire Dan Gilbert and the extraordinary series of investments—especially the acquisition and development of more than 100 properties in Detroit and Cleveland since 2011, have made the city a go-to metropolis—and an emerging U.S. technology hub: Fiat Chrysler has announced a $4.5 billion investment in five Michigan plants, creating about 6,500 jobs in Michigan; Waymo, the self-driving technology company owned by Alphabet, the parent company of Google, opened its first factory in Detroit late last year—in its own way commemorating Ford’s long history in the Motor City, thanks to its Model T, the first affordable mass-produced automobile, which was made at the company’s Piquette Avenue Plant, built in 1904.
Choo Choo! Michigan Central Station opened in 1913, replacing a station which had burned down—a station which by the war years of World War II saw more than 4,000 passengers passed through it each day. In this car manufacturing hub of the country, however, by the end of the war, car travel overtook train travel, contributing to the city’s fiscal foundering—and then the 1967 race riots crushed assessed property values, draining one of the city’s most valuable fiscal resources—and discouraged Michigonians from wanting to live in a rare city more dependent on income than property taxes. Thus, the last trains, operated by Amtrak, departed Michigan Central Station in 1988, after which the station closed and fell into disrepair.
Community Benefits. With trains no longer a centerpiece for the city’s physical and fiscal future, the City Council is considering lower project thresholds to trigger Detroit’s Community Benefits Ordinance, as well as more community meetings and longer agreement review times are among a list of proposed changes to the ordinance that locks in guarantees and other protections for communities. The Detroit City Council’s Legislative Policy Division has offered or proposed a list of 17 items to the community in order to trigger feedback to the City Council as it mulls over changes to a voter-approved ordinance which mandates developers to commit to hiring and other quality-of-life benefits for residents living in the area of proposed large-scale developments. Indeed, the City Council has been working for more than a year to draft possible changes to the ordinance: when Motor City voters passed the ordinance in 2016, it made Detroit the first city in the nation to require developers of large-scale projects to negotiate benefits packages with neighborhoods.
Nevertheless, critics of the new ordinance claim it includes no enforcement mechanisms—thus, the City Council has asked a legislative staff working group to review 62 recommendations during seven, five-hour meetings: it was from that list that the seventeen emerged: the Detroit community benefits ordinance applies to developments which meet at least one of three requirements: 1) if the development project is $75 million or more in value; 2) the project receives $1 million or more in property tax abatements, or 3) receives $1 million or more in value of city land sale or transfer.
When the ordinance is triggered, a Neighborhood Advisory Council is established with residents from the area the development will affect. That group is tasked with negotiating with the developer for benefits including hiring preferences, recreational amenities and funds for home repairs.
Interestingly, a team from Ford, which has its own vital stake in the effort, looked East to New York City—or, as a team member noted: “For this part, we have looked at images from the High Line in New York for inspiration,” referring to the elevated park on the West Side of Manhattan. The auto company, which is helping in the efforts to revitalize Corktown, Detroit’s oldest neighborhood, created by Irish immigrants about one mile west of downtown. Nevetheless, just as a train needs to be connected by tracks, so too connecting the various pockets of development in Detroit remains a challenge.
Not Disconnecting Neighborhoods. Just as a train must be connected to stations, so too Mayor Duggan has been focused on trying to ensure that revitalization efforts benefits all of the city’s residents: that remains a challenge, for while the city’s unemployment rate fell from more than 20 percent a decade ago to 3.4 percent last November, it is still higher among African-Americans, who make up nearly 80 percent of the city. Moreover, in a city dependent on income tax revenues, Detroit still has one of the highest poverty rates in the nation—more than one-third, which, although reflecting an improvement from the nearly 40 percent of five years ago, remains a serious fiscal challenge.
Thus, finding ways to attract the city’s growing number of visitors and their influx of cash has been a key element of the Motor City’s recovery: some fourteen million visitors came to the area in 2013, according to the Detroit Metro Convention and Visitors Bureau, a number that jumped to nineteen million last year. Detroit has four major-league sports teams, all of which play in the downtown area. There are several arts venues in the downtown district, such as the Detroit Opera House and the Fox Theater, a performing arts center that opened as a movie theater in 1928. Aaron K. Foley, who was Detroit’s “chief storyteller” from 2017 to 2019, said he was “cautiously optimistic” about the city’s progress. His role was created by the mayor as an attempt to diversify the way Detroit was portrayed—noting he had become tired of people arriving in Detroit and “beelining to take photos of the empty buildings and empty train station…Detroiters have a name for that: ‘poverty porn.’”
Putting Puerto Rico’s Local Governments at Risk? An attorney for the PROMESA Board, Martin Bienenstock, has reported that mediation over Puerto Rico’s central government debt is making progress, with his comments coming as Judge Laura Taylor Swain ordered parties involved with the central government debt types to enter into mediation in July. Mr. Bienenstock added it was possible that in the coming month there would be an announcement manifesting mediation progress during a Title III omnibus bankruptcy hearing in the U.S. District Court for Puerto Rico, noting there had been progress in the mediation over Puerto Rico’s central government debt; he also said he hoped the PROMESA Board would make a Title VI bankruptcy filing for the Puerto Rico Industrial Development Company sometime after next month.
Title III of the PROMESA Act lays out a traditional court-supervised bankruptcy process; Title VI lays out a process for creditors to negotiate and approve agreements before the PROMESA Board presents them to the court. In addition, Judge Swain, on Wednesday, ordered some changes to how she will address issues related to municipal revenue bonds, with bonds from the Highways and Transportation Authority, Puerto Rico Infrastructure Finance Authority, and Convention Center District Authority affected. Judge Swain stated that instead of holding a hearing with regard to all revenue bond topics on February 27th, instead there would be a preliminary hearing on March 5 and maybe March 6 and that it would only covers issues of standing and security interest. She noted she wanted a “meet and confer” meeting with parties by February 7th and that she would push back arguments with regard to lifting stays on litigation for the revenue bonds to a date after March 6th.