Detroit’s First Bankruptcy Trial Witness

Detroit’s First Bankruptcy Trial Witness

Attorneys for the city of Detroit have put their first witness on the stand today as part of the city’s bankruptcy trial. Formally, Detroit’s bankruptcy case opens next week. But Judge Steven Rhodes granted the city’s request to have one witness testify early.

The witness is Robert Cline, formerly the national director of state and local tax policy economics at Ernst & Young, where he worked on forecasting for Detroit how much revenue it would raise from major tax sources during the next decade. Cline has a doctorate in economics from the University of Michigan and was the director of tax research for the state.

City attorneys say Cline’s testimony will include explanations of complex financial projections and revenue forecasts. He’s in court this morning where he’ll be questioned by attorneys representing the city and creditors.

Cline has taken a position with a Paris-based non-governmental group, the Organisation for Economic Cooperation and Development, whose conflict-of-interest policies prevent Cline from testifying after he begins work later this week. He is being paid $754 an hour, plus expenses, by Jones Day, the law firm handling the city’s bankruptcy case. Cline says he has worked “30 to 35 hours” so far.

Here are some notes from his testimony:

Judge Rhodes swore in Cline shortly after 9 a.m. Jones Day attorney Geoffrey Stewart (who used to represent Prince Jefri Bolkiah of Brunei) questioned Cline. He began with a review of Cline’s 40-year career in tax revenue forecasting. They discussed a bit about his work for Detroit at Ernst & Young, where he led the team of 5 economists who did a decade-long projection of revenue from personal and corporate income, casino and utility taxes.

“I would describe the forecasting we did here as very complicated in the sense of what was changing in the underlying economics for the city,” Cline testified. “It was also complicated in the sense that there were also a number of laws and administrative changes taking place that were varying the tax collection amounts.”

9:50 a.m. A few points from Cline’s testimony:

Population forecasts show city’s residents falling to 641,354 by 2050.

Detroit collects the highest income tax allowable by state law: 2.4 percent for residents and 1.2 percent for nonresidents.

Post recession, Detroit’s recovery as judged by unemployment, lagged behind the state’s.

10:40 a.m. Cline and Stewart are walking through a series of charts and spreadsheets that show forecasts both with and without the planned restructuring. But they are only telling us what the charts are and not not really providing any actual numbers, percent changes, etc for items like rates of growth, employment and tax collection.

Although we did get this quote from Cline when questioned about one report about future tax revenue:

“It shows, I believe, modest increases in the rates of growth. It shows a continued strengthening of the Detroit economy, but I would characterize the numbers as reasonable but modest increases.”

10:52 a.m. Regarding casino tax revenue, Cline testified the city collects 10.9 percent on casino tax revenue with an additional 1 percent collected on adjusted gross receipts. (State law allows the city to collect taxes from the casinos.) Part of his analysis of future casino tax revenue took into account the opening of Hollywood Casino Toledo, just an hour’s drive away, that is expected to draw some customers away from Detroit’s casinos.

Cline’s forecast predicts a 1 percent growth rate in casino tax revenue.

We are moving on to a discussion about the utility tax…

10:58 a.m. Forecasts for utility tax revenue include the assumptions that a stronger economy and the city restructuring, post-bankruptcy, will lead to an increase in revenues but “ongoing efficiencies” in energy use will reduce the tax rate, Cline testified. He predicts a 1.5 percent growth rate.

11:30 a.m. After an 18-minute recess (the judge is very precise…) court is back in session. Syncora attorney Douglas Smith is cross examining Cline, the city’s expert witness about tax revenue forecasting.

Here’s is Smith’s bio.

12:07 p.m. Smith asked several questions about what assumptions Cline used about tax laws when creating his forecasts about tax revenue. Cline repeatedly said he used current tax laws and rates. Smith asked if Cline considered the possibility of increases to taxes. “In the current political environment in Lansing, Michigan, it would be very unlikely that there will be a tax increase in the near or foreseeable future,” Cline replied.

Syncora attorney Smith said he’s got another hour or two of questions for Cline.

Lunch break until 1:30 p.m.

1:50 p.m. Smith, an attorney for bond insurer Syncora, questioned Cline about whether his forecasting for Detroit’s tax revenues included looking at collection rate. Cline said he assumed the current collection rate in his future estimates of city tax revenue.

This is an issue because a Citizens Research Council of Michigan report cites a study that found $142.3 million of individual and corporate income taxes go uncollected by the city. It’s on page 23 of this report.

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2:10 p.m. Smith and Cline had these exchange:

“If you change the assumptions, the result of the forecasting model exercise you performed could change, right?” Smith asked.

“It could if you could change one of the assumptions that we call a driver in the forecast,” Cline answered.

“The assumptions you used have already changed over time, correct?” Smith asked.

“Correct,” Cline answered.

“You agree there are many activities, including activities by the city that could affect the forecasting, correct?” Smith asked.

“Yes,” Cline answered. … “I have an understanding there will be changes the city will make that will have, I believe, an effect on the private sector economy.”

4 p.m.

Cline assumed a corporate revenue growth rate of 3 percent in preparing his revenue forecasts. Unlike the state, which only forecasts corporate revenue for three years, Cline’s projections go out for several years.

Cline testified his projections for revenue from the city’s utility tax include subtracting some amounts to account for the Public Lighting Authority. He relied on other Ernst & Young analysts for that amount.

Syncora is done with questioning, and the city attorney will do re-direct now.

4:10 Cline is done testifying.

The city has 79 hours, 6 minutes left to make its case while creditors’ attorneys share 82 hours, 15 minutes, per the judge’s rules for the case.