As Detroit Struggles to Make a Comeback, it Faces $19 Million Bill from Firms Hired to Help it Sort Through Bankruptcy

This city is learning that it is expensive to go broke.

Kevyn Orr, the emergency manager brought in by Gov. Rick Snyder, is paid $275,000 a year by the state.
Even as it wrestles with the $18 billion of debt that has overwhelmed it, Detroit has already been billed more than $19.1 million by firms hired to sort through that debt, search for ways to restructure it, and now guide the city through court. That does not include more costs that the city is expected to bear for the support staff for its state-appointed emergency manager, and for another set of lawyers and consultants to represent city retirees.

"It's just ridiculous," Edward L. McNeil, an official with the local council of the American Federation of State, County and Municipal Employees, said of the mounting costs. "The only thing that's getting done is that these people are getting paid big-time while the citizens of Detroit are getting ripped off."

The uncharted scale of Detroit's bankruptcy -- it is the largest municipal bankruptcy filing in the nation's history in terms of both the city's population and its debt -- suggests that it may also become the costliest, experts say. City officials offer no estimate for a final tab, but some bankruptcy experts say the collapse could ultimately cost Detroit taxpayers as much as $100 million. As of last week, 15 firms had contracts with the city that could total as much as $60.6 million, city records show.

Some lawyers and other consultants are accepting discounted fees, and a fee examiner has been appointed to ensure that bills stay within reason. Still, the soaring costs are a jolt to retirees and creditors bracing for cuts to payments they once expected.

Some lawyers from the firm Jones Day, which charged the city $3.6 million for four months of work this year, bill for as much as $1,000 an hour, documents filed with the city show. The firm also forgave the city more than $1.2 million in additional costs during the same period, and accepted fee caps as part of its contract, the records show, resulting in effective hourly rates that are lower.

A financial analyst who graduated from college last year drew intense media attention here when bills showed that his services were costing $275 an hour -- $26,000 for two weeks, and that was only part of the more than $200,000 his turnaround and restructuring firm, Conway MacKenzie, had billed for the same two-week stretch, records showed.

The State of Michigan is required to pay $275,000 a year to Kevyn Orr, a former Jones Day partner brought here by Gov. Rick Snyder's administration as an emergency manager assigned to find a way out of the financial mess. But the city itself will pay $225,000 a year each to two top aides to Mr. Orr -- aides who city officials say replaced two similar positions in the mayor's office -- as well as smaller salaries for a few more workers as part of Mr. Orr's team.

Among other tolls the city now unhappily finds itself bearing: $200,000 (plus as much as $50,000 in expenses) to Christie's, the auction house, to appraise works at the Detroit Institute of Arts as part of the proceedings, despite strenuous objections of Detroit leaders at the very thought that the art may be at risk.

Even the bills for Robert M. Fishman, the Chicago lawyer appointed by the bankruptcy court judge as the fee examiner assigned to scrutinize fees billed to the city, will be paid by the city. His price: $600 an hour for him (a discount, court documents show, from his usual $675) and $430 an hour, at most, for his firm's work over all. His bill for August seeks $28,407.85 for his work so far, in addition to more than $14,000 for his law firm and $5,000 more for a consulting financial firm.

"They say we're broke, but yet we're still taking money from our budget to pay people to help us resolve issues that we could handle without outside help," said the Rev. W. J. Rideout III, a local pastor.

The costs are mostly unavoidable, bankruptcy experts unconnected to Detroit's case say, and probably will fall far below the totals spent in major corporate bankruptcies. Because municipal bankruptcies, known as Chapter 9, are extremely rare, they require expertise from a relatively small cast of lawyers and consultants, the experts said, particularly given that the city's creditors have hired their own top-flight lawyers. Meanwhile, most of the city's consultants are seeking significantly less in Detroit's circumstances than they usually do. Conway MacKenzie, for instance, is charging 25 percent less than its usual rates, the company said.

"These are very competent, very experienced professionals," Bill Nowling, a spokesman for Detroit's emergency manager, said of the city's advisers. "They don't work for free. To get to the level of work we need, we have to pay those competitive fees. But we're always very conscious of, 'Are we getting value for our money?' "

One complication of estimating the cost of Detroit's crisis is that the tally includes not only court proceedings, but also broader, lengthier efforts to reshape the city's finances and operations. Long before the city sought bankruptcy protection in July, as city officials raced to restructure its finances, Detroit already was hiring some of the 15 firms with sizable contracts; at least two of the firms, city records show, had contracts for related work approved before 2013. Hiring was initially done by the City Council and, after Mr. Orr was sent to repair Detroit in March, by Mr. Orr's office.

Some costs, too, will be paid by the state, officials said, noting that Michigan has agreed to pay as much as $4.7 million to share a portion of the city's contracts with four firms, including Conway MacKenzie and Ernst & Young, the financial adviser.

Other expenses, including Mr. Orr's housing (he stays in a condominium at the Westin Book Cadillac hotel) and travel (he regularly flies to his family home in the Washington area), are being paid by New Energy to Reinvent and Diversify, known as NERD, a nonprofit fund created by Mr. Snyder as a "social welfare organization" and not required, under federal provisions, to divulge its donors.


Source: The New York Times | MONICA DAVEY
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