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Michigan takes over Detroit in "Olympics of restructuring"

Michigan Governor Rick Snyder talks about the city of Detroit being in a financial emergency state during a meeting with an invited audience
Michigan Governor Rick Snyder talks about the city of Detroit being in a financial emergency state during a meeting with an invited audience

By Steve Neavling

DETROIT (Reuters) - Michigan Governor Rick Snyder on Thursday announced a state takeover of Detroit's finances and appointed as manager a corporate bankruptcy expert who took a can-do attitude toward turning around the destitute city, calling it the "Olympics of restructuring."

Kevyn Orr, an attorney who worked on the restructuring of Michigan-based automaker Chrysler, said as the city's emergency financial manager he hoped to avoid a bankruptcy filing by Detroit, something that would rank as the biggest municipal bankruptcy in U.S. history.

"Let's get at it and work together because we can resolve this, people of good faith. Don't make me go to bankruptcy court," Orr told a news conference, where he was introduced by Snyder and flanked by Detroit Mayor Dave Bing.

Snyder's move amounts to the biggest state takeover of an American city in over two decades. Orr, who was officially approved by a committee of state officials on Thursday, is expected to assume financial management of Detroit on March 25.

As the emergency manager, he will supplant the authority of Detroit's elected officials, both the mayor and the city council. Orr will have broad powers, including the ability to renegotiate labor contracts, privatize services and sell certain city assets.

The announcement marked a watershed moment in the history of Detroit, which has been in a long economic decline. The city was the birthplace of Motown music and once the thriving center of the U.S. auto industry. In the 1950s, it was the fifth largest American city at 1.8 million people, but now ranks 18th with 700,000.

Snyder praised Orr, 54, as the right person for the job.

"He's had a very successful career in restructuring and bankruptcy. He's one of the leading experts in the country," Snyder said.

In addition to his work with Chrysler - for which Orr billed $1 million in fees during the first year of the restructuring of the smallest of the three major U.S. automakers - Orr has other Michigan ties. He received both undergraduate and law degrees from the University of Michigan.

He is African-American, which some politicians have said could help him deal with community leaders in a city that is 83 percent black.

The emergency manager will face the huge and controversial task of repairing the finances of a city in crisis. Detroit has run operating deficits for nearly a decade, is starved of cash and facing a crushing burden of debt from commitments such as pensions and health insurance.

Outside the building where Snyder spoke on Thursday, several dozen Detroit residents protested the state takeover, waving American flags and holding signs that read "Fighting for Justice." Some Detroit residents feel that their right to vote for their own leaders is being usurped by an unelected manager.

More than a third of Detroit residents are officially classified as living in poverty, and it has an unemployment rate of 18.2 percent, far above the U.S. jobless rate of 7.7 percent, according to government figures.

Basic services such as street lights and police protection have broken down, and the city has suffered from mismanagement and political corruption. Just this week, former Detroit Mayor Kwame Kilpatrick was convicted of two dozen federal charges of corruption and bribery linked to kickbacks on city contracts.

And while the auto industry has shown an impressive recovery, little of that has trickled into Detroit's coffers. General Motors is headquartered in the city, but only one major assembly plant, operated by Chrysler, is left inside the city limits.

'THE GREATEST TURNAROUND'

Orr said if the emergency takeover of Detroit succeeds, "it will be one of the greatest turnarounds" in U.S. history. He said his contract as emergency manager was for 12 to 16 months, but he hoped to finish the job faster.

It is rare for such a large American city to come so close to bankruptcy. The best known case was New York City, which was nearly forced into bankruptcy in 1975 after it ran up huge debts. The state of New York appointed an oversight board to guide its finances.

The most recent major city to face such a crisis was Philadelphia in 1991, which was managed by the state of Pennsylvania for a time.

Neither of those cities officially filed for municipal bankruptcy.

James Spiotto, law partner at Chapman and Cutler in Chicago and one of the nation's top experts on municipal restructuring, said Detroit has a good chance of avoiding bankruptcy.

"I am optimistic that you have good people at the city, good people at the state and a good emergency financial manager. It's got all the ingredients for being successful," he said.

Some investors remain wary of owning Detroit's debt.

"We need to have a clearer picture of what their liabilities are," said Guy Davidson, a prominent institutional investor as the director of municipal bonds at Alliance Bernstein.

"We need revenues in line and to see basic services delivered at costs that fit their economy," Davidson said. "When we see that ... we can think about being investors again."

Snyder has advocated talks involving Detroit bondholders and other interested parties to reach new debt terms, but the timing for such sessions appears far from imminent.

"Quite frankly, until I get into and understand the rights and obligations and the willingness of the bondholders to work in a consensual way, I really won't have an understanding of what truly needs to be done," Orr told Reuters on Thursday.

Detroit city leaders have long opposed a state takeover, saying they were making progress on improving the financial situation. The mayor, a former professional basketball player and steel executive, said on Thursday he would work with the new emergency manager.

A defiant city council had called on residents to fight the move, but council President Charles Pugh said on Thursday he would try to work with Orr.

Detroit could challenge the takeover in state court. Such attempts have failed in Michigan in the past.

Michigan state law grants emergency financial managers broad powers and a new law going into effect later this month allows the manager to terminate collective bargaining agreements with the city's 48 unions.

(Reporting by Steve Neavling in Detroit; Additional reporting by Dawson Bell in Lansing, Michigan, Karen Pierog in Chicago, Paul Lienert in Detroit, and Michael Connor in Miami.; Writing by Greg McCune; Editing by Mary Milliken and Leslie Adler)

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