Day Three: Detroit’s Bankruptcy Trial

Day Three: Detroit’s Bankruptcy Trial

See below for updates throughout the day. WDET’s Sandra Svoboda is in the federal courthouse following the proceedings. She’s also on Twitter @WDETSandra.

Opening statements are stretching into a third day in Detroit’s bankruptcy trial, technically a confirmation hearing on the city’s Plan of Adjustment — the “blueprint” for how to restructure debt and reinvest in city services. Bankruptcy Judge Steven Rhodes is presiding over the hearing and will eventually confirm or reject the Plan.

Most of the attorneys who have chosen to make opening statements have taken longer than they predicted to introduce the reasons they support or object to the bankruptcy restructuring plan. As the trial continues — it’s scheduled into October — the city, its supporters and creditors will put witnesses on the stand to help the judge decide if the plan is feasible, reasonable and not unfairly discriminatory to creditors. Those are standards used in bankruptcy law to decide if the plan to shed debt is adopted.

4:37 p.m.

Syncora attorney Douglas Smith continues to cross examine Detroit’s Chief Financial Officer John Hill, mainly by suggesting measures Detroit could take to increase revenues. A few of Smith’s latest ideas: implementing taxes on vacant and blighted properties. (This is done in Washington D.C. where Hill lives.)

Hill tried to address the feasibility of such proposals. “You have to look at collectability,” Hill countered.

Bond insurer Syncora stands to lose hundreds of millions of dollars in the bankruptcy restructuring. The city’s current Plan of Adjustment proposes paying the Bermuda-based company about 10 cents on the dollar.

Through his questioning of Hill this afternoon, Smith is making a case to Judge Steven Rhodes that the city could 1) do more to increase its revenues 2) reduce its expenses 3) adjust its financial projections that would, on paper, show more available cash in the restructuring that could be paid to financial creditors such as Syncora.

4:10 p.m.

With testimony this afternoon largely focused on detailed financial charts on display in the courtroom, there have been some tedious discussions. City attorney Geoffrey Stewart wrapped up his questioning of Detroit Chief Financial Officer John Hill after about three hours, and now Syncora attorney Douglas Smith is cross examining him.

Smith’s questions have so far focused on brightening the city’s financial picture. He’s asking about what revenue isn’t collected and when it might be. For example, “tens of millions” of dollars go unpaid on properties, Hill admitted under questioning. Grants could be better managed — funds have gone unspent and had to be returned in the past.

Smith also turned to the question of how the city might better collect income taxes and asked about what initiatives are coming to ensure payments from “reverse commuters”: Detroit residents who work outside of the city and do not pay the income tax they owe.

Hill says there is a plan in the works for “piggybacking” of the city’s income taxes with the state’s collection of its income taxes. An agreement is being discussed, he said, and it would increase collection rates. City residents pay 2.4 percent in income tax.

The initiative could start in 2016 for collection of the 2015 tax year. “It has to be phased in because of the withholdings,” Hill said.

Attorney Smith raised this issue with the trial’s first witness, Robert Cline, a financial advisory who appeared Aug. 18 because he took a new job in Europe and was available after that day. Incidentally, 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..

12:02 p.m.

Court is on lunch break. Here’s the last thing city CFO John Hill said on the witness stand: Of the $1.7 billion the city intends to put toward restructuring and service improvement, about $200 million will come from the loans. The rest will come from surpluses from the plan and from initiatives that decrease expenditures and increase revenues.

11:57 a.m.

Attorney question: How important are the restructuring initiatives to the success of Plan of Adjustment as the city exits bankruptcy?

Detroit Chief Financial Officer John Hill: “I think they’re very important. What is also very important is improvement in the financial management systems which is one of the restructuring initiatives. Without that improvement, it would be very difficult for the city to get the kind of information it needs to operate. … I could not imagine some of these initiatives not being done and the city either improving its operations or its access to information or its ability to control its resources.”

Attorney: Is there a master schedule anywhere for the restructuring initiatives?

Hill: “We have a schedule that actually shows the restructuring initiatives that have been applied for funding.”

Attorney: Who will ensure the initiatives are completed?

“I believe the CFO, I’ve taken responsibility for that. I believe ultimately it’s a joint responsibility between the CFO and the mayor because these are restructuring initiatives that need to have operational oversight as well.”

11:30 a.m.

Here are some excerpts from the testimony of Detroit Chief Financial Officer John Hill. (More below!)

On the Plan of Adjustment:

“We definitely believe that the plan gives us a road map to how we should be operating.”

On if the city could change provisions of the Plan of Adjustment:

“There has to be approval for deviation from the plan by the Financial Review Commission, and so the plan really becomes a road map for how we would operate going forward.”

On improvements being made to accountability within city government:

“There have been issues in the past where people started contracts without approval but those holes are being plugged.”

11:01 a.m.

Detroit CFO John Hill’s testimony covered his relationship with the mayor, likely an effort by the city attorney to show that reforms in the Plan of Adjustment that are already underway would be supported by the city administration after the bankruptcy case is complete and Emergency Manager Kevyn Orr’s term ends.

Hill has a direct-line reporting relationship with Orr and a dotted-line relationship with Mayor Mike Duggan, he testified.

“But that’s not really the way we’ve operated,” Hill said. “The dotted line means the mayor has an interest in the work I’m doing but is not able to direct that work. … I’m in at least three meetings a week with the mayor, I have a one-on-one meeting with the mayor. All of the plans I want to implement I have detailed discussions with the mayor on those plans. The mayor is a part of the review process for determining the quality-o-life projects that move forward so we coordinate with the mayor on that. It’s pretty much the normal relationship you’d expect with the executive of a city.”

Hill says he would “be upset” to leave some of the projects he’s started because he wants to see them through. And that could take a couple years.

City attorney Geoffrey Stewart asked Hill if he’s had conversations with the mayor about staying on past the current contract time. Hill said the mayor asks him if he’s “bought a house yet.”

Hill’s answer?

“I’m more of a downtown condo guy,” he said.

10:50 a.m.

An attorney for the city is questioning Hill about how financial operations are being restructured (read: improved.)

Hill described how property tax assessment capabilities are being improved with the help of helicopter- and street-level data collection.

“We will have data verified for every property in the city,” he said. “We are right now going through the verification of that entire database.”

Grants are being better managed, and new systems are being purchased, Hill testified.

“We’re in the middle of a fast-track process to acquire a new financial management system,” Hill said, adding the city has two that it has two cloud-based system it is choosing from. “We are currently evaluating both systems with the help of a consultant and we believe we’ll have a selection by the end of September.

The new system, he said, will allow better accounting, reporting, monitoring and reporting. Hill said the city did not close the books monthly and evaluating the yearly reports was challenging.

“The annual statement took us a very, very long time to prepare and have audited,” Hill said. “We put a team in place to make sure the audit became a priority. The Emergency Manager and I wanted to make sure that we got the 2013 audit done, and it was, and we also have a team now that’s working on monthly closes for our financial statements. We’ve begun identifying all of the issues with those monthly closes and we’re working on those now.”

10:30 a.m.

The first witness is on the stand, city Chief Financial Officer John Hill. He’s being questioned first by city attorney Geoffrey Stewart, of the Jones Day firm. Here’s Hill’s expert report related to the Detroit bankruptcy case.

J_HillHill was the executive director, the top staff member, of the Washington D.C. Control Board that worked to restructure that city’s financial and operational management systems. While there, he also worked with department heads to improve efficiency and with the mayor and city council to get them to support “necessary changes” including reductions in staff. There also were efforts to forecast revenues and expenditures. He also worked at Andersen where he was the partner in charge of state and local government-related work and now operates his own consulting company.

At the invitation of Emergency Manager Kevyn Orr, Hill has been CFO in Detroit since November where he’s helped establish that office and “managed the consensus budget process” that is being put in place.

He’s also working on grants management. Here is Orr’s order that established a Grants Management Department.

Hill has a contract through September, though he expects that will be extended until a new CFO is appointed, per the new state law requiring such a position in the city. That measure was a condition of the city pensions receiving $195 million in state money as part of the “grand bargain.”

9:44 a.m.

AFSCME Council 25 is represented by Richard Mack, who concerns are similar to the UAW attorney. AFSCME represents employees whose pension and health care benefits are PAID for by a separate entity — the state, for example. But since those benefits are administered by the city, they are proposed for cuts in the Plan of Adjustment.

“They’re impairing benefits that have already been paid for,” Mack said. “I think that’s an important point.”

State law, Mack said, prevents the city from cutting contractual obligations. “We would simply ask that the plan not be confirmed unless those provisions are removed,” he said.

9:39 a.m.

UAW attorney Peter DeChiara objects to the plan because of cuts it makes to library employees’ and retirees’ pensions and health care benefits as well as its requirement for the recoupment of annuity savings funds.

“The library is not a debtor in this case and the library’s obligation are not debts of the debtor that are subject to adjustment by this court,” he said. “(The library) engages independent of the city in collective bargaining with units that represent its employees, including the UAW. …It is the library not the city that pays out of its own fund the pension contributions for employees and retirees” and has done so since 1938.

“It continues to make those contributions today,” he said. The benefits are administered by the city.

9:31 a.m.

Allan Brilliant, attorney for Macomb County, and Max Newman, attorney for Wayne County, both urged the judge to reject the Plan of Adjustment.

They repeated some of Quadrozzi’s arguments related to DWSD, mainly the $428 million that the city intends to move out of the DWSD budget and partially into the citywide pension funding.

“If we take money out of DWSD at this point, we are going to render it vulnerable to capital breakdown,” Newman said, adding he agreed that $4.5 billion should be a target for the amount of structural improvements to the system.

9:01 a.m.

Representing Oakland County, attorney Jaye Quadrozzi objected to the portions of the city’s Plan of Adjustment that involve the Detroit Water and Sewerage Department. She was critical of the city’s plan, in part, because of the financial projections it uses to calculate DWSD-related budget forecasts. She said the city’ plan would cause “untenable deficits and shortfalls” to DWSD budgets.

She questioned the city’s plan to replace just 1.5 miles of the system each year, pointing out it would take 561 years to complete such a project. And what happened 561 years ago? “It was the end of the Middle Ages,” she told the judge. “DWSD clearly needs more than that.” Quadrozzi said Oakland County would like to see 8.5 miles replaced annually and she called for a $4.5 billion investment in the system for the work.

The judge halted her statement.

Judge: You can’t come to court and say the city needs to spend $4.5 billion on capital improvements without an answer to the question of where the money is going to come from.

Quadrozzi: I believe the answer to that question lies in a number of legs of a DWSD table.

She went on to say one leg is “keeping DWSD money inside DWSD.” Another leg is internal reforms to operations. “We would suggest that’s undergoing slower than Oakland County would want and I think slower than DWSD itself would want. … There is an effort to optimize within the organization.” The third leg, according to Quadrozzi, is “rightsizing.” She said, “DWSD has a huge service area, thousands of miles” and called for “an analysis for what can be done to shrink the system to provide the essential service that needs to be provided.” She described the fourth leg as raising rates.

Judge Rhodes asked Quadrozzi several questions during her introductory argument, telling her “I raise these questions not because I have any preconceived notions about the answers, but now is the time to solve these problems. It’s not enough to just say we have problems.”

8:30 a.m.

Judge Steven Rhodes opens today’s proceedings. Jaye Quardrozzi, an attorney for Oakland County, has about 15 minutes left in her opening statements. She’s objecting to the plan because of the provisions related to pension funding and the Detroit Water and Sewerage Department. Oakland County has 62 municipalities that are part of the city system.

Also expected this morning making opening statements objecting the plan are attorneys representing Macomb and Wayne counties, the UAW, which represents library employees, and AFSCME Council 25.