Detroit EFM: The Mad Scramble

Rod Meloni discusses Detroit City Council's appeal of EFM, possible candidates for position

By Rod Meloni - Reporter, CFP ®
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LANSING, Mich. - Detroit Attorneys David Whitaker and Irvin Corley Jr. made impassioned pleas against an Emergency Financial Manager in Lansing on Tuesday.

They together made the emotional case that said the City of Detroit is operating under a consent agreement largely at the behest of the State. Yes, they admit the City was slow-moving in making much progress, but now it is underway and making progress toward having a $100 million surplus by June 2014.

They said the city is trying to execute the state's deal and a "deal is a deal." The state should continue allowing the city to meet the milestones set forth in the agreement. They also stripped out much of the debt that they say has revenue attached to it and pleaded with the hearing officer [Chief Deputy Treasurer Mary MacDowell] to ignore what they called exaggerated debt numbers the State Review Team attributed to the City.

Read more: Rod Meloni recaps Detroit hearing in Lansing

Whitaker concluded the city's presentation by claiming the Emergency Financial Manager Law is anti-democratic and he can't understand why anyone would want to make a move that provocative when the city is perfectly capable of fixing itself either with an expanded consent agreement or a new one.

Frederick Headen, the state's review team representative, said yes, a deal is a deal, and it's one the City of Detroit failed to live up to. He told MacDowell the city displayed a notable lack of enthusiasm to move forward and had little confidence the City could or would abide by a second consent agreement which it has asked for the governor to seriously consider instead of an Emergency Financial Manager.

Outside, a small protest put on by the national action network decried any notion of an emergency financial manager as well. In fact, the Rev. Charles Williams made a promise that he and thousands of protestors would form a human chain around the City County building downtown and prevent an EFM from even entering the building. Williams has been able to block traffic a couple of times around Detroit since the governor declared the financial emergency in Detroit, whether he can make good on this threat remains to be seen.

Is an EFM on his or her way to Detroit? There hardly appears any doubt. Mayor Bing certainly believes one is coming, even council members who attended Tuesday's hearing admitted they were swimming upstream and living on the hope they might prevail. The hearing officer's report after the hearing hadn't made it to the governor's desk by late in the afternoon and the governor presumably reads that before making any decision on the city's appeal. While it is not official, my Lansing sources believe the governor will have an announcement on Friday.

There are some things that need pointing out here. The governor himself does not appoint the Emergency Financial Manager. That is handled by what is known as the State of Michigan Emergency Loan Board after the Governor finds the necessity for an EFM after declaring once and for all a financial emergency. The local papers in Detroit have been running front page stories with the name and biography of the man they've heard floated as the number one candidate for the job.

He is Kevyn Orr of Jones Day, one of the largest law firms in the world. He hails from the Washington office and was there today at his desk, though he did not answer his phone. He is African American, 54 years old and Maize and Blue educated. He does carry the pedigree of a perfect candidate. But my Lansing sources are saying they are not so certain he is the guy.

There are four people who know: The governor, The Treasurer, the candidate and another person in the governor's inner circle. I was told they are not leaking so the belief that Orr is the guy is likely a product of Detroit City Hall wishful thinking. We will soon see.

There is also the question of whether Orr could avoid conflict of interest claims as EFM considering Jones Day [Orr's law firm] was just hired by the City of Detroit as restructuring counsel.

Read more: Kevyn Orr may be top candidate for Detroit emergency financial manager

So far what the city has done or not done has not worked. Yet, under no circumstances should we be comforted by an EFM's appointment. Here is the problem. Under the new state law the Emergency Financial Manager will only get eighteen months. The scope of the debt and spending problem so far outstrips City Council's understanding that Michigan State University Economics Professor and EFM expert says the job is so big that a Chapter 9 bankruptcy filing may not even work. He believes an EFM could only get a process started but undoubtedly will not have the time to finish. Yet the bankruptcy option is a bad one in that he believes getting prepared, then going in and then out of Municipal Bankruptcy could take five years! The bottom line here is the city is so poor it can't afford bankruptcy and it doesn't have enough time for an emergency financial manager.

All of this adds up to a nightmare scenario no matter how you slice it. This amounts to absolute chaos. The EFM is headed for legal challenges which will only take more precious time and delay the inevitable. There are no good options here and it is difficult to be optimistic that no matter what happens Detroit can get what you would call "fixed."

The Governor feels compelled to act. The city's cynics feel compelled to try and stymie any process that would undo the status quo. Bankruptcy experts appear flummoxed over the right course of action: welcome to the dysfunction that is Detroit.

I often tell my children when in doubt DO SOMETHING! Try and move forward as best you can with optimism. It's my advice to all involved here. Yet, you might also lower your expectations too. There are no ready or easy answers to Detroit's fiscal mess.

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