While at the Detroit Regional Chamber’s Mackinac Policy Conference, Craig Fahle spoke with former state Treasurer Andy Dillon who resigned in November. Appointed by Gov. Rick Snyder, Dillon was in the post while Detroit’s finances were assessed, Emergency Manager Kevyn Orr hired, and the city’s bankruptcy filed.
Here’s a full transcript of the discussion:
Craig Fahle: Let’s talk a little bit about your career trajectory first. I want to get that out of the way. You’ve been working for Conway MacKenzie, this is one of the firms that is involved in Detroit’s bankruptcy proceedings. The announcement of this came out and there’s was a lot of response to this. Of course the Democrats wanted to suggest that this is proof of some crony capitalism going on. A lot of people making hay of this, and even Conway MacKenzie said they didn’t necessarily want to publicize this because they were worried about a potential backlash. How worried were you about a potential backlash?
Andy Dillon: It’s an election year so you can expect that but the accusation that this was quid pro quo but you know the interviews for hiring the firm with Detroit was 10 people in the room, the city ultimately made the choice so I was one of 10 people involved.
CF: Talk a little bit about your role at Conway MacKenzie, what you’re going to be doing. One of the things you’ve said is that the vast majority of your work is going to be out of state. Is that the best utilization of your resources and your skill set given the knowledge that you have about what’s happening here in Michigan.?
AD: I think so. I mean, clearly Detroit is not alone in terms of being a trouble unit of government and what I learned in the job as treasurer, I had 10 emergencies and probably a couple dozen cities that were under stress so I spent three years working with them and what I discovered in that role is the private sector turnaround folks don’t make the transition all that well to government. It’s just a different animal. Conway has as much Chapter 9 experience as any firm in the country. They’ve been involved with Stockton and Jefferson County, Alabama.
CF: That’s not saying a whole lot because there’s not that many instances of this. But when you get a sense and you look at the way this is progressing in Detroit, do you see this becoming a more attractive option for a number of cities that were really fearful of this option before?
AD: I wouldn’t say more attractive.
CF: There’s nothing attractive about it but it may not be as bad as they potentially thought it could be.
AD: The rules of the road haven’t been established yet. That’s why there’s uncertainty in this, But having that option out there is helpful and you see Harrisburg, Pennsylvania, they actually restructured outside of a bankruptcy. That’s the ideal way to go and I think that’s where one of the needs that we had at the state level was when you have a broken city, a broken balance sheet, typically they also have broken operations and that’s where the roots of this firm growing up in the automotive sector, when they came int o deal with a troubled supplier, they had to make sure the part shipped on time so they became both operational as well as financial advisers. It’s that ingredient that’s kind of missing in the private sector right now.
CF: But you look at a situation like Harribsurg, different situation than in Detroit. You look at the outstanding liabilities Detroit had with pension obligations and some pretty bad deals they had made, the interest rate swaps and all that kind of stuff. Is there a point where you look at it and say it’s just not a viable option to think about doing this outside of a court-overseen restructuring?
AD: That’s right. I think Harrisburg, one incident was an incinerator that indebted the city beyond what they could handle
CF: And that’s basically what happened in Alabama as well. There was a facility, I think it was a wastewater facility.
AD: You’re right. There are so many creditors in Detroit, to try and harness any kind of an outcome. A “9” is probably your best option.
CF: So that begs the question, I mean, at what point did you recognize that Detroit was going to have to go that route. A lot of people would suggest that we just had this dog and pony show with some of the various steps we had to take to get to this point.
AD: If you look at Detroit’s situation it was really the retirement health care, and right now there’s litigation ongoing in Flint where they tried to adjust the health care because the liability in Flint when I started as treasurer was $860 million on a budget of $60 million. So that was clearly unsustainable, and Flint made some adjustments and now are in the federal court litigating whether or not they can make those adjustments. That was the biggest problem for Detroit: $5.8 billion of unfunded liability for retirement health care. That really was what the primary issue was for Detroit.
CF: Was it obvious though when you started this whole process that we were eventually going to get to this point but you have to take these certain legal steps to get there.
AD: I wouldn’t say it was pre-ordained now because you didn’t really know at the outcome that the health care solution would be for Flint. FI you could restructure that outside of a Chapter 9 then Detroit had a fighting chance but unfortunately they couldn’t make the changes fast enough, and what really was kind of at the very end that called the question was when they were running out of cash. I ‘ll let you know because I think we’ll have to start moving hen.” And it was November of 2012, I think when they were actually below $50 million in reserves and I called up the governor and said, “I think we need to start a review.”
CF: When you took that job you were obviously in the Legislature for a long time before that but did you really have a full understanding before you took the Treasurer’s job as to the precarious state of so many communities’ fiscal situations?
AD: It was on our radar but what I didn’t realize is it turns out that I probably spent 75 to 80 percent of my time on distressed local units and that, I don’t know if a prior Treasurer ever spent nearly that time on distressed local units of government so it was a completely different job in my three-year tenure.
CF: How much of that was due to the fact that Gov. Snyder has basically said, “We can’t have this. We have to fix it.” Were we in denial before that?
AD: Yeah. I think so with a lot of units. The city of Highland Park has been in serious trouble for a long time, Flint as well. Here’s a governor willing to roll up his sleeves and do the tough stuff and I valued that. It was great to work for him.
CF: Well you know you start this process, of course, you’re no longer the state treasurer but you watch what’s happening right now, the Grand Bargain coming together in the Legislature. You spent a lot of time there at a very, very hyper partisan time in Lansing when you were there. It was a tough place to get anything meaningful done because of the divide that existed. Are you surprised that they’ve been able to come together and that the House votes came out the way they did?
AD: Yeah, a little bit. I kind of sense it was going to get done just with the tenor and the tone of the media reports on its possibilities. You know it’s the right thing to do. The sooner we get Detroit out of the Chapter 9 process the better.
CF: What about this grand bargain, tough? It’s really remarkable to see the different parties coming together to support pension funds the way that they are, protect the DIA at the same time. When you start this process do you look at that as something that’s, was it on anybody’s radar before a couple of people really stepped in and kind of created this negotiation?
AD: We put a lot of time into prepare for Detroit whether it be a Chapter 9 or just an out-of-court restructuring so if you really look at that 10-year plan, that’s the focus. The challenge for Detroit is going to be holding up to that plan, and you’ll see there’s about half a billion dollars of revenue that should come in without raising taxes but that requires execution and then there’s, don’t hold me to the number, but maybe $600 million of savings from being more efficient and that will require execution as well. Even when the Chapter 9 process is over, there’s still execution risk to the transaction.
CF: So for you looking at the revenue structure in Detroit as you did obviously when you decided to go this route, what are the potential red flags that you see about Detroit’s ability to stay out of this situation? Population loss is a big part of the problem.
AD: Mayor Duggan hit the nail on the head yesterday: we’re not going to solve Detroit without regrowing the city, and I think his focus on selling homes rather than demolishing them is a great first step. That’s one thing I do like about the plan as well. Gov. Snyder said we’re not just going to fix the balance sheet and move on. We’ve got to improve the city. So if you look at the 10-year plan, there’s $1.5 billion being invested in improving the services for the city and making it more livable. So it’s going to be a five- to 10-year turnaround but the commitment to grow and improve the city is there, and I think that will be the magic ingredient.
While Detroit’s “Grand Bargain” drew a lot of attention last week at the Mackinac Policy Conference, Phil Power answers the question, “What about the rest of the state?” Power is the president of The Center for Michigan, a centrist “think-and-do” tank that produces Bridge Magazine, one of the Detroit Journalism Cooperative partners.
Writing in the Holland Sentinel, Power says:
The plain fact is that Michigan’s entire system of financing local government is tottering on the brink of collapse. This is similar to what was happening with school finances, prior to Proposal A. With all that’s going on just now – battles over the roads, the Detroit “Grand Bargain” and the need to recess to campaign in the coming election, I doubt there is enough energy, will, and time this year for our lawmakers to step up to meet the challenge.
The bankrupt California city of Stockton began four days of hearings today aimed at confirming its restructuring plan. Until Detroit, Stockton was the country’s largest municipal bankruptcy. Now many are watching it for signs about what might be coming with Detroit’s Chapter 9 case.
In Stockton, the remaining creditor is Franklin Resources Inc. (BEN) which says it’s being unfairly treated compared to other parties owed money by the California city. Under the city’s current proposal, Franklin would get just 1 percent of the $35 million it’s owed. Bloomberg’s Steven Church reports :
Franklin says it’s being unfairly targeted: two of its funds would get only 1 percent of the $35 million they are owed under the current plan, while other creditors are due to collect anywhere from half to all of what they are owed.
While Detroit attorneys have reached a few deals with creditors, they haven’t been successful with all parties, leaving the probable situation of a contested trial on its Plan of Adjustment in July. As the Stockton situation plays out this week, it may be foretelling some of what Detroit may expect later this year.
The chief mediator in the Detroit bankruptcy case named two federal judges as mediators for continuing discussions toward a regional water authority. U.S. District Judges Sean Cox and David Lawson will facilitate discussions between the city and Macomb, Oakland and Wayne counties as they return to negotiating under the direction of Bankruptcy Judge Steven Rhodes. This morning, Rhodes ordered the parties back to the table to renew talks about an authority with shared governance between the city and the counties.
“The creation of a regional water authority is not only in the best interest of the city but also in the best interest of all the customers of the city’s water department,” Judge Rhodes said. “The customers of the water department, since we’re talking about a governmental function here, ought to have the opportunity to participate in the governance of that water authority and the governance of the delivery of water services, and that can only be done through a regional authority.”
The city has issued a “Request for Information” seeking proposals from private companies to manage the system after talks about the regional authority broke down. Suburban county leaders said the city’s proposals called for the non-Detroit municipalities to put too much money into the department and objected to their contributions potentially being moved to the city’s general fund.
With Judge Rhodes’s order today, the parties will resume talks.
If you can’t make it to the Wayne State University Law School event today, “Detroit’s Bankruptcy and Beyond: Organizing for Change in Distressed Cities,” find the live stream here.
The remaining schedule is:
10:30 a.m. to noon: Panel discussion “Detroit: Historical Roots & Current Effects on Bankruptcy”
Noon to 1:30 p.m.: Keynote Address by Angela Glover Blackwell, founder and president of PolicyLink.
1:30 to 3:15 p.m.: Panel discussion “Distressed Cities: A National Perspective”
3:15 to 4 p.m.: Keynote Address by Ronald Sims, senior professor of business administration at The College of William & Mary
4 to 5:30 p.m.: Panel discussion “Working Within and Through Municipal Distress”
Both Crain’s Detroit Business and the Detroit Free Press published pieces about the solicitation for private bids for the Detroit Water and Sewerage Department by Emergency Manager Kevyn Orr.
With negotiations with suburban counties deadlocked, the City of Detroit has issued a request for offers from private companies to operate and manage the Detroit Water and Sewerage Department. … Orr, who is steering the city through the largest municipal bankruptcy in the nation’s history, said the city has a duty to its creditors to explore all options, especially since the city’s proposal for the creation of a regional authority with Oakland, Macomb and Wayne counties is stalled.
Meanwhile, in coverage of Orr’s speech at the University of Michigan Tuesday, Crain’s Amy Haimerl wrote:
…Orr also cautioned not to read too much into a recent request for proposals that the city put forward late last week with prospective private sector buyers to purchase or lease and manage the assets of the Detroit Water and Sewerage Department. The department, which has about $6 billion in debt of its own, comprises nearly 3,000 miles of pipes and connectors over more than 1,000 square miles, and talks about forming a regional authority to manage its assets after bankruptcy have recently stalled.
A 21-page request for information obtained Tuesday by Crain’s calls for interested bidders in a possible sale or lease of the department’s water and sewer network to submit bids by June 1, with a possible award to a bidder coming in August. But Orr characterized that request Tuesday as one option the city could pursue, among many.
“We would like to have the (surrounding) counties at the table, they account for 65 percent of (department) revenue,” Orr said, but went on to add that Detroit must also demonstrate to U.S. Bankruptcy Judge Steven Rhodes that it “looked at every available option…to raise revenue” for the city, before a confirmation hearing begins in late July.
Is Royal Oak Township next?
In the wake of Gov. Rick Snyder’s confirmation that a financial emergency exists in Royal Oak Township (not to be confused with the city of Royal Oak…), the Metro Times opined about the possibility that the .5-square-mile municipality could be the next Michigan locale to file for Chapter 9 bankruptcy. Under Public Act 436, the existing law that addresses local financial emergencies and emergency manager powers, the township may pick an emergency manager, petition for Chapter 9 bankruptcy, neutral mediation, or a consent agreement, the alternative newsweekly writes, continuing:
… the treasury had found the township failed to submit an annual budget, owes hundreds of thousands of dollars on police services, and overspent more than $500,000 than what it had in its coffers last year. Whichever solution is eventually pursued, the situation isn’t pretty.
Message to the unions
Many media reported about Emergency Manager Kevyn Orr’s speech Tuesday at his alma mater. Here’s what the Detroit News led with:
Detroit Emergency Manager Kevyn Orr on Tuesday amped up the pressure for a bankruptcy deal, warning unions that funds pledged toward pensions are at risk and proceeding with plans for a privately run water department. Orr … urged the city’s unions to reach an agreement on bankruptcy terms soon or risk the loss of more than $800 million in funding to shore up pension funds.
MLive columnist Rick Haglund found himself in the Los Angeles area on personal business, but used his time there to take a look at the similarities and differences between Michigan’s and California’s financial situations and municipal bankruptcies in this column.
Both states have faced statewide budget challenges and had cities in bankruptcy: Detroit, of course, Michigan, with Stockton and San Bernardino on the west coast. Both states have governors who have led aggressive efforts to remedy state budget deficits.
But the methods used by the states to deal with their financial issues, Haglund writes, are vastly different.
California’s scary budget deficit has been erased, mainly through an income tax hike on the rich that voters approved in 2012… Michigan has taken a different tack in its recovery course. Snyder’s first budget in 2011 cut taxes for businesses, and raised them for pensioners and many low-income families.