Restructuring Detroit and its Statewide Impact

Michael O’Callaghan wondered what to expect when he walked into an Atlanta conference hall two weeks after Detroit’s landmark bankruptcy filing.

O’Callaghan, executive vice president and COO of the Detroit Metro Convention & Visitors Bureau, was in Atlanta for the annual meeting of the American Society of Association Executives. He knew that one word in his title -“ Detroit -“ was sure to spark some comments given the city’s Chapter 9 reorganization was national news.

He was pleasantly surprised to hear people offer words of support. Rather than criticism, people seemed to recognize that Detroit is trying to turn things around through this financial restructuring, O’Callaghan said. That gave him the belief that Detroit is indeed fulfilling its destiny as America’s Comeback City.

“Everybody we talked to wanted to see Detroit survive, come back and do well. That was heartening because we didn’t have to walk around with our head hung low,” O’Callaghan said. “Without fail, people told us they recognize that Detroit is very important. It’s important that Detroit rebounds and gets stronger. The reality is that we’re going to set precedent for other cities.”

On July 18, Detroit’s Emergency Financial Manager Kevyn Orr did something that much of the Michigan business community feared as a necessary evil: He filed a petition to begin the city’s bankruptcy proceedings. With more than $18 billion in debt and liabilities, Detroit became the largest municipality to ever file for Chapter 9 protection.

While the full impact is not yet known, state business owners, industry groups and observers agree that Michigan took a hit with the bankruptcy filing. The damage to the area’s reputation was felt nationally and internationally as people wondered: Would the Motor City have the drive to go forward? Or was this the final end?

Not at all, argue people including Steve Hilfinger, the executive vice president and chief operating officer for the Michigan Economic Development Corporation.

“At the MEDC, we are very supportive of the bankruptcy filing because we think it will create a Detroit that is ready for investment,” Hilfinger said. “If we could have one goal coming out of the restructuring both financially and operationally, we want a Detroit that’s viewed as very attractive to Michigan business and those out of state.”

Tourism may notice the earliest hit; campaigns like the “Pure Michigan” branding effort may help lessen that blow. Those ads will help get Michigan the out-of-state visitors it needs, said Dr. Dan McCole, an assistant professor of commercial recreation and tourism in the department of Community, Agriculture, Recreation and Resource Studies at Michigan State University.

“Those (people) with no connection to the state only know what is in the national news. To them, all of Michigan is Detroit. It’s the Rust Belt. It’s automotive. ‘Pure Michigan’ is doing a great job of telling the story that Michigan residents know -“ that the state is quite lovely, especially in the spring and fall,” McCole said.

However, there also are early signs that Detroit’s bankruptcy won’t have a negative effect on the region as a whole. For example, Standard & Poor’s reaffirmed Oakland County’s AAA bond rating in late August with a stable outlook. In fact, the ratings group called the county, which is led by longtime County Executive L. Brooks Patterson, “the best-managed county in America,” the county said in a written statement. S&P also cited the county’s fiscal strength and budgeting practices as reasons to invest in its bonds.

Simply put, Chapter 9 will allow Detroit to work on its financial problems without creating interference with its main role: To provide essential city services to its 700,000 residents. Orr has said that he plans on completing the bankruptcy proceedings with the court’s assistance in a timely fashion; most believe that Detroit could finish its reorganization in mid-2014. Among its debts are $5.7 billion in unfunded retiree health insurance and $3.5 billion in unfunded pension payouts for about 20,000 retirees and 10,000 current municipal workers.

The bankruptcy served as a landmark moment in Detroit’s storied history.

It also made the city a poster child for municipal battles of survival. Detroit’s issues with its retirement funds, employee contracts and financial stakeholders became emblematic of those around the nation. It wasn’t just Detroit facing a restructuring -“ it was a look into the near past and future for many other great American cities, including Chicago, New York City, Pittsburgh, Los Angeles and others. Even Time magazine fed the conversation with its headline, “Is Your City Next?”

It is arguable that bankruptcy has had an effect on every aspect of Detroit’s operations. Union negotiations are ongoing, but they are likely to be contentious and fraught with discussions of winners versus losers. Court filings show that Detroit’s largest unsecured creditors are its two pension funds, which have claims topping $3.7 billion in estimated unfunded liabilities. Bondholders also are significant creditors in the case, holding hundreds of millions of dollars of general obligation bonds.

Business leaders may vary in their opinions on what led to Detroit’s financial turbulence. But those interviewed for this article were unified in one thing: Detroit had to make a significant, impactful change when it came to how it ran its books and treated its residents. And Chapter 9 bankruptcy, albeit painful, was the right decision.

Those first hours after the filing were among the most significant, many agreed. The press conferences and national news programs where Orr, Mayor Bing and Gov. Snyder came together for the bankruptcy announcement was a strong message to the state and nation as to how this decision was made, O’Callaghan said.

Campus Martius became a playful, “activated” park with a beach, live music and a bar thanks to what is known as placemaking, an effort supported financially and otherwise by Quicken Loans and its top executive, Dan Gilbert. Photo by Paula Turner

“People are really impressed with the fact that the governor and the mayor have both taken this bold move. They took the bull by the horns and addressed it. It was a political risk, but they did it with the understanding that this mission is more important than the risk they may be making in their political careers,” O’Callaghan said.

That same day, one of Detroit’s biggest cheerleaders -“ Quicken Loans CEO Dan Gilbert -“ put himself and his workforce of more than 8,000 firmly behind the city, its leadership and its future.

“We are all in. We are more committed than ever to Detroit and the opportunities downtown. Detroit’s best days are ahead,” Gilbert said in a written statement.

The positives of restructuring
While bankruptcy is painful, damaging and frightening for some, it also is a construct that will help turn Detroit around in a way no other person, place or thing ever could, business leaders agreed.

“Bankruptcy is never good news. But given the circumstances, Detroit is on the best path forward,” said Sandy K. Baruah, president and CEO of the Detroit Regional Chamber. “Instead of muddling through, Detroit is boldly confronting its challenges.”

For example, downtown Detroit has enjoyed a resurgence of development over the past five years as a huge influx of locally based companies brought their headquarters there. While those “friends and family” style investments are helpful, there have been less than a handful of firms from outside of Michigan that have chosen to settle in those same corridors.

There will be a lull in interest because of the bankruptcy; potential new employers may shy away coming into the area. But having that restructuring process in place may make it easier to “sell” Detroit, the Southeast Michigan region and the state as a whole to site selectors and others making the decisions on where to open a business or relocate.

Businesses in Oakland County, such as Royal Oak’s Lumen Legal, are supporting Detroit’s comeback. Dave Galbenski is the founder and executive vice president of the legal staffing and consulting company. Since 1993, Lumen Legal has expanded from its Royal Oak headquarters to include U.S. and international offices offering consulting, outsourcing, secondments, staffing and document review in the legal services industry.

General Motors Corp. saw a rebound in sales and attitude after its much-publicized bankruptcy. Photo by Vito Palmissano

Galbenski said that he considers Detroit’s restructuring to be an issue of vital importance to all Michigan businesses. That is because all of the state is connected both physically and mentally by those outside of the state, tying Michigan’s fortunes to that of Detroit. He also believes there are many reasons to be optimistic about how the bankruptcy will play out in the public’s mind.

“It’s about leveraging our strengths. We have a highly intelligent, highly trained workforce. We also have lower real-estate costs than the rest of the nation,” Galbenski said. “What we’ve found is that people are choosing to bring their business here. Large corporations and legal firms are bringing their jobs to Michigan. That echoes throughout other industries as well.”

Detroit also has the benefit of what Galbenski described as “the early innovators,” using the theories put forward by Everett Rogers, a professor of rural sociology, in his 1962 book “Diffusion of Innovations.” These innovators include entrepreneurs such as Dan Gilbert, who brought Quicken Loans into downtown Detroit and subsequently purchased more than 30 other buildings to populate the Woodward Avenue corridor.

“They see the opportunities here and are investing in Detroit. Next will be the young people, who will want to work and live in the city, who will accelerate the city’s development,” Galbenski said. “These theories apply to Michigan and show us that there is hope on the other side of this. Business leaders can leverage their strengths and bring them to Detroit.”

“If we focus on the strengths -“ not the weaknesses -“ we can have the outcome we want. At the end of the day for me, the way Detroit comes back is each of us puts on an entrepreneurial mindset. We need to see more, not less,” Galbenski said. “You don’t have to start a business. You don’t have to move downtown. But you need to see the future and tell others. That’s how every single person in Michigan can support the Detroit comeback.”

Detroit-based businesses also are “all in” when it comes to the city’s turnaround. Christopher S. Sheeren is a partner at Detroit-based Huron Capital Partners, one of the leading operationally focused private equity firms investing in lower middle-market companies. Huron is fully committed to the city and its growth, Sheeren said, and the proof is in the numbers. When he joined the firm in 2004, there were six employees. Now there are 23.

Since its founding in 1999, the firm has helped niche companies develop, resulting in revenue and profit growth in excess of 50 percent on average. It also has raised more than $1.1 billion in equity over that time. It recently started a fourth fund as well.

Sheeren is responsible for sourcing and evaluating investments made by Huron as well as the firm’s overall marketing and business development activities. He and the firm’s nearly two dozen employees are continuously traveling, meeting firms nationally and throughout Canada.

As a firm, Huron Capital sees the Detroit bankruptcy as a significant positive, Sheeren said. Because of its downtown headquarters, Huron’s employees are well aware of the city’s challenges. With the restructuring, they are confident Detroit can fix its balance sheet “and start fresh,” Sheeren said.

Most of the companies Huron Capital works with have to visit the firm’s offices at least once or twice a year for meetings. So they see the changes in Detroit’s downtown core, and they quickly become ambassadors of the city and its recent improvements, Sheeren said.

“Broadly speaking, people read the headlines about Detroit and assume the worst. But the bankruptcy was absolutely the right move. It will pave the way for further revitalization and growth. It will expand upon the excitement of what’s happening downtown. This was an area of absolute blight 10 years ago and now it is one of the most vibrant areas of the city,” Sheeren said.

“We recently had someone in from Indianapolis, and he was sitting outside by Campus Martius by the Fountain Bistro restaurant. When he came back inside, he was quick to say that Detroit was nothing like he expected,” Sheeren said. “When we’re traveling to meet with clients, we try to wave our Detroit banner as much as we can. We’re trying to create more ambassadors for Detroit. There’s more optimism here than there has been in decades.”

Impacting the Detroit, Michigan brands
However, experts generally agree there are things that Detroit needs to do both as a municipality and as a “brand” so to speak to make sure its bankruptcy has the intended impact.

Detroiters rallied around the city’s many notable symbols, including the Spirit of Detroit statue. Many Michigan residents and ex-pats also showed their pride in the city despite its financial troubles. Photo by Vito Palmissano

Detroit’s bankruptcy is a short-term hit, said Doug Rothwell, president and CEO of Business Leaders for Michigan, an organization made up of the CEO’s from the state’s largest job providers. Business Leaders for Michigan conducts research, develops strategies, educates the public and leads and advocates for actions to grow Michigan’s economy.

“For people who have only heard the bad things about Detroit, this just piles on. But in less than 10 years, you’re going to see the image change much for the better outside of Michigan in the minds of businesses. Detroit will be that much further ahead dealing with the issues many major cities are facing,” Rothwell said.

Realistically, Rothwell argues, the city’s economy crashed three or four years ago and has been on the upswing ever since. The bankruptcy was rock bottom for Detroit’s government, and that is new territory for all parties. As this is a new process for everyone, there is uncertainty as to some of the twists and turns the restructuring will take along the way.

As a result, he believes it is important for the city and the state to over-communicate the city’s recovery and the business community’s commitment.

“There is a commitment from the state and the business community to see this through,” Rothwell said. “The Detroit region is a region of 5 million people. It’s a very vibrant, healthy, growing region. Yes, 700,000 people in Detroit are now going through bankruptcy. But the city doesn’t’ stand alone in this (and) we’re going to be in a better financial situation than if we hadn’t gone through all of this.”

Even if there are negative headlines, Detroit and the larger region shouldn’t focus exclusively on that, said Josh Linkner, CEO and managing partner at Detroit Venture Partners, a high-tech
venture fund in Detroit. He described the city’s bankruptcy proceedings as “not an ending, but a beginning. We’re cleaning up our balance sheet; we’re not closed for business.”

“When General Motors Corp. went into bankruptcy, all of the headlines went crazy with negativity. Since then, no one talks about the reorganization that way. It only helped,” Linkner said. “In this case, all of Detroit is better off as a result of the Chapter 9 filing. We had to take decisive action. We couldn’t keep kicking the can and hoping for the best. This should have been done 30 years ago.

“Procedures like this are painful, but they are necessary. This will pave the way to a much brighter future for our city and our region,” Linkner said. “We still believe in our original message and that is symbolized in the phrase, ‘Opportunity: Detroit.’ We are focused on the future and that there is tremendous opportunity for Detroit. And it’s a message that’s starting to resonate with others.”

Michigan and its business community were largely ready for the bankruptcy; they had seen the emergency financial manager appointment and knew the challenges that took place with his subsequent negotiations with creditors, said Hilfinger of the Michigan Economic Development Corporation.

In his position, Hilfinger works with MEDC’s senior leadership to achieve the strategic objectives of supporting business growth and creating more and better jobs throughout Michigan.

The city’s significant assets, including the Detroit Institute of Arts’ impressive collection, seemed at risk at the beginning of the bankruptcy proceedings.

Additionally, a broader view of Detroit’s bankruptcy also must include Gov. Rick Snyder’s efforts to reinvent Michigan, Hilfinger said. The governor’s long-term goals included reviving Detroit, and the state’s attempts to work through a consent agreement with the city, its mayor and council proved largely ineffective.

Hilfinger also notes that many groups within Detroit, including Mayor Dave Bing, the Detroit Economic Growth Corporation, Midtown Inc., Eastern Market Corp. and many others have been cooperative partners in the city’s revitalization. Hilfinger said the bankruptcy actually brings additional clarity to the work these groups and the MEDC are doing together and separately, allowing these projects to move forward more efficiently and quickly.

One significant challenge, however, is how to explain the bankruptcy proceedings to the state’s international contacts. Some countries view the Chapter 9 restructuring through a very different lens, and that may prove an issue in those relationships, Hilfinger said.

“We’re used to the idea of restructuring in Michigan and in the automotive sector. We’ve seen it work well and we see what the industry is doing now and the benefits of restructuring. When you translate that to the restructuring of Detroit both financial and operational -“ it seems like a logical step,” Hilfinger said.

“In Europe and Asia, the word ‘bankruptcy’ often gets equated with liquidation. We have to turn up our communications with some of the companies and governments and places where we’re trying to attract investment from and put it in context. We’re restructuring city government, not the business climate or community,” Hilfinger said.

Having strong messages from the automotive companies, individual businesses as well as Detroit Regional Chamber, Business Leaders for Michigan and other groups reaffirms the movements the MEDC is making throughout the bankruptcy process, Hilfinger added.

The city’s resiliency is akin to that of Cobo Center, which is in the midst of a $279 million renovation. When completed, Cobo will have a ballroom and a 30,000-square-foot atrium to show off the Detroit River and other impressive views. Courtesy Cobo Center

“We think from a business side of things, this is a positive development based on what we’ll have at the end of the day, which is an investible, restructured city that is a magnate,” Hilfinger said. “Detroit has a lot of great things going for it. You cannot restructure unless you have assets. And Detroit has so many assets: the people, the attractions, the places. That makes it possible to restructure. What hasn’t been there is the political alliances to do that.”

Farewell to the “B” word
Jeff Caponigro, president and CEO of Caponigro Public Relations Inc. in Southfield, is known as one of the country’s most respected public relations professionals and an expert in crisis management. His mantra for the bankruptcy has been something like this: If you don’t communicate some sort of message, it typically will get communicated by itself and you don’t want that to happen.

“We’ve seen a spattering of messages, and we are positioned as America’s comeback city. That’s great; it’s putting a positive spin on the bankruptcy. We’re taking action to get where we need to be,” Caponigro said. “But the more fundamental issue is: Who is Detroit? What do we stand for? What do we want to be known as? That’s the big question mark.

“Without knowing where we want to end up, I don’t know how you can make certain decisions during this bankruptcy phase,” Caponigro said. “A great example is the Detroit Institute of Arts and its assets. If you’ve decided that you want to be known as an arts and creative community, you probably shouldn’t touch that.”

One thing is clear to Caponigro and other business leaders: At a certain point, Detroit needs to leave the “B” word out of the conversation.

“People get confused what bankruptcy even is. They think you’re out of business and that you’re never coming back. You don’t want to be tattooed with this for the rest of our generation,” Caponigro said. “Let’s say ‘restructuring.’ We’re restructuring the debt so we can move on. That shows we’re getting somewhere. We’ve got a direction, and that’s where we’re heading.”

All in all, the state should be proud of the fact that Detroit is moving forward, Caponigro argues.

“Everybody should be proud of it. We’re doing something. Maybe we’re not all there yet, but we know where we’re going and we know what needs to be done,” Caponigro said. “Let’s leverage (this moment) by giving them some added messages around that.”

To Baruah and others, bankruptcy alone is not the solution to Detroit’s decades-old problems. But there are plenty of examples of cities that went through a significant financial restructuring and came out the better for it.

“Some issues can be resolved through this restructuring,” Baruah said. “But others need improved leadership, improved processes and improved expectations.”