Metro has hired one of the nation’s top bankruptcy lawyers to advise the agency on fixing its troubled finances, which could include restructuring debt, taking a hard line against wage and benefit hikes in labor negotiations this year and trying to wrest more money from Washington-area jurisdictions, officials said.
Kevyn D. Orr — who had a major role in guiding Detroit through the biggest municipal bankruptcy in U.S. history, enabling the once-dying city to get tenuously back on its feet — will serve as a part-time “strategic executive adviser” to Metro General Manager Paul J. Wiedefeld, several officials said.
The contract with Orr’s law firm, for up to $1.74 million, was finalized last week. Metro spokeswoman Sherri Ly confirmed the deal Wednesday.
Orr, who also helped Chrysler in its huge bankruptcy reorganization and was an adviser to financially struggling Atlantic City, will aid Wiedefeld’s efforts to cut Metro’s rising costs, boost stagnant revenue, accelerate federal grants and persuade political leaders in the region to increase funding of the beleaguered transit system.
“We might have discussions with our bondholders and with the banks” about easing the agency’s debt load, said one Metro official, who, like others, spoke on the condition of anonymity because no specific financial changes have been decided on.
“We’ll have discussions with the jurisdictions,” meaning Maryland, Virginia and the District, which have tightened the purse strings on Metro. “We might have discussions with the unions, either in the context of contracts or in the area of pensions and other benefits. There’s a potential for a lot of engagement on reducing our expenses.”
As Detroit’s state-appointed full-time emergency manager for nearly two years, starting in March 2013, Orr had extraordinary authority, including the power to hire and fire workers, terminate contracts and sell off assets. Formulating a resurrection plan for the city entailed difficult bargaining and consensus-building with numerous entities, including creditors, unions, philanthropies and the Michigan legislature.
By the time a bankruptcy judge approved the plan in November 2014, Orr and other key players had jettisoned $7 billion of Detroit’s $18 billion in debt. Among those who paid a price were retired municipal employees, who incurred a 4.5 percent reduction in their pensions and the elimination of future cost-of-living raises.
Orr, who is the partner in charge of the Washington office of the giant law firm Jones Day, did not respond to phone messages seeking comment.
He will have a much more limited role with Metro than he did in Detroit, counseling Wiedefeld as the agency wrestles with long-intractable money woes. Wiedefeld inherited the problems when he took charge of Metro in late November.
In Detroit, with his unilateral control of city administration and a bankruptcy court protecting him from the demands of lenders, contractors, unions and others, Orr had far greater latitude in implementing financial reforms than Wiedefeld does.
“There’s no Chapter 9 bankruptcy that Metro is in a position to leverage,” one official noted. “It’s going to be about using his experiences in Detroit and other places to talk logic and sense to our stakeholders, that we all have a common interest in the health of the organization and a safe, successful Metro system going forward.”
With subway ridership trending downward since 2010, and with local jurisdictions reluctant to boost their financial contributions, Metro is in a bind. Its $1.7 billion operating budget for the fiscal year that begins July 1 envisions $845 million in subsidies from the jurisdictions, the same as this fiscal year’s total, and $890 million in revenue from fares and other sources, a 5 percent decline.
Of the $1.7 billion in expenses, $1.2 billion is for pay and benefits, most of it going to employees represented by three unions, each of which has a contract with Metro that will expire June 30. Negotiations on new labor deals are set to begin soon, and key members of Metro’s governing board want Wiedefeld to stand firm against wage hikes.
Jackie Jeter, president of Local 689 of the Amalgamated Transit Union, the biggest bargaining unit in Metro, did not respond to a request for comment.
Besides the $1.7 billion operating budget, Metro has a $1.3 billion plan for capital improvements in the next fiscal year, which relies heavily on federal grants.
In early 2014, however, federal officials began restricting the agency’s access to grant money after a scathing audit report described Metro’s extensive mishandling of such funds for years. Until the Federal Transit Administration certifies that the agency has fixed its grants-management systems (another issue Wiedefeld is grappling with), grant money for big infrastructure upgrades will continue to be slow in arriving.
To help cope with the cash squeeze, Metro has repeatedly resorted to short-term borrowing, including tapping large lines of credit with banks. At times, the agency’s short-term debt has hovered around $500 million, with resulting costly interest payments.
In October, a few weeks before Wiedefeld was hired, Metro retained two consulting firms, McKinsey & Co. and Ernst & Young, at a combined cost of $2.9 million to do what the agency called a “top to bottom” review of its management and financial systems. Officials said McKinsey & Co. is focused on proposing money-saving efficiencies across the agency while Ernst & Young is concentrating on the grants-related problems.
The companies will soon present Metro with “a blueprint for change,” an official said, and Orr’s job will be to help Wiedefeld muscle the plan to fruition. Hiring Orr as well as the two consultants means that Metro will spend about $4.6 million just to get on the road toward solving its financial problems.
“There are going to be a lot of things we’ll want to get done, coming out of the McKinsey and [Ernst & Young] work,” the official said, “and that’ll involve significant negotiations, significant restructuring efforts, including the debt.”
The official said he hopes Orr will help Metro persuade Washington-area political leaders to invest heavily in the transit system, just as he helped persuade initially reluctant legislators in Michigan to make a major financial commitment to Detroit.
Orr, 57, who received bachelor’s and law degrees from the University of Michigan, was recruited by Gov. Rick Snyder (R) to be Detroit’s emergency manager. He accepted the position for a bargain price of $275,000, saying he regarded the job as a civic duty.
But his firm, which employs about 2,400 lawyers in more than 40 offices on five continents, does not come cheap.
In Chrysler’s bankruptcy restructuring, starting in 2009, Orr was among Jones Day’s busiest partners, charging up to $750 an hour for 1,504 hours and collecting $1 million in fees, according to the Reuters news agency. Metro, which said only that Orr’s fees will be capped at $1.74 million, would not disclose details of the contract without a written request under its Public Access to Records Policy, which requires processing time.
After finishing in Michigan in January 2015, Orr was chosen by New Jersey Gov. Chris Christie (R) to be an adviser to Atlantic City’s emergency manager. The move raised concern on Wall Street that Orr would shepherd the financially ravaged casino-resort city into bankruptcy. But that did not happen.
Orr departed New Jersey three months later after helping the manager, Kevin Lavin, write an interim report that called for reducing municipal expenses by $10 million a year, including cutting the city’s 1,150-member workforce by 20 percent to 30 percent.
At the time, last April, Metro board members were floundering in their search for a new general manager, and Orr’s name came up in discussions.
“He indicated early on that he didn’t want to take on that role, that he was more interested in getting back to the practice of law,” one official recalled.
As another put it, “He wanted to go back to Jones Day and make some real money.”