Day Four: Detroit’s Bankruptcy Trial (with media round up)

Day Four: Detroit’s Bankruptcy Trial (with media round up)

The first week (ok, four days because of Labor Day) wraps up today in Detroit’s bankruptcy trial, and we’ll be blogging from the courthouse when testimony resumes later this morning (See below). The city’s Chief Financial Officer John Hill will be back on the witness stand where he’ll continue to be cross examined by bond insurer Syncora’s attorney. Syncora, of course, objects to Detroit’s plan to restructure its debts as the Bermuda-based company stands to be paid 10 cents on the dollar for the hundreds of millions of dollars the city owes it.

Meanwhile, here is our coverage from the first three days: Day One, Day Two, Day Three.

And here’s a bit of the work from our colleagues who are sharing space in the media room during the trial:

Detroit Free Press bankruptcy page. Detroit Free Press trial live blog Day Three.  The Detroit News bankruptcy page. The Detroit News trial live blog Day Three.

WDIV’s Rod Meloni has been covering the case nearly full time. His latest work is here with links to previous stories. WXYZ’s Jim Kiertzner also regularly files about the bankruptcy. Watch his stories and read his blog here.

Another diligent reporter is Steven Church from Bloomberg. His latest story, which takes more of a national perspective, is here.

5:01 p.m.

We are finished for the day. Charles Moore will return to the witness stand, as his cross examination is not finished.

I’ve got some catching up here from some of what we heard today — I’ll do a separate posting over the weekend about the testimony related to the recoupment of Annuity Savings Fund monies from retirees.

We’ll be back at 8:30 a.m. Monday. The city is expected to call Beth Niblock, who is in charge of information technology for the city.

4:25 p.m.

Earlier today, Charles Moore testified that Detroit fire fighters had balanced pop cans on a fax machine so that when an emergency transmission came in, the sound of the cans falling would alert them.

Many of us in the media room thought that needed to be checked out and verified.

Well, Tresa Baldas from the Detroit Free Press did. Here’s her story.

She writes:

Detroit is so broke that firefighters get emergency alerts through pop cans, coins, door hinges, pipes and doorbells. And they make these gizmos themselves … In most cities, fire officials say, when an emergency alert comes into a fire station, a series of bells sound off – like Morse code. Then an automated voice offers instructions on which engines go where. “Well, we don’t have that system here,” (Detroit Deputy Fire Commissioner John) Berlin said. “The firefighters modify … they improvise.”

2:20 p.m.

Perhaps we will get some additional information during the cross examination, but Charles Moore just testified that under the Plan of Adjustment, the mayor’s office would add $20 million in additional labor for “lean resources” but save $17.5 million in other budget items.

The City Council budget shrinks, primarily because much of the planning commission functions are moved to another department. There is a planned $200,000 investment in staff training for council employees.

36th District Court would have more of a paperless court system, so much of the $4.2 million in planned technology spending there would go toward that. Other resources are going toward improving the collection rates of tickets, judgments and “anything else the court could collect” from 20 percent to at least 50 percent.

1:30 p.m.

We’re back in session with Charles Moore still on the witness stand. Before the lunch break, he testified that the former Detroit City Airport would see nearly $16 million of upgrades if the current Plan of Adjustment is adopted, according to testimony this morning.

Moore said the improvements are aimed at maintaining the operating certificate at the airport, officially known as the Coleman A. Young International Airport.

“There are a variety of potential uses for the airport,” he said. “The airport under the FAA has to comply with federal guidelines and, in particular, the airport operating certificate is to ensure that there is a level of safety involved.”

11:57 a.m.

Detroit has about 300 parks, but nearly 200 have closed over the last several years.

Mayor Mike Duggan wants them all re-opened, according to testimony today.

That’s why the city’s Plan of Adjustment calls for the parks and rec department to spend $38 million to bring them back online along with a handful of recreation centers around the city.

“This is a very significant initiative for the mayor,” Charles Moore testified. He’s a restructuring expert. “He has indicated this is very important for the livelihoods of the residents in the neighborhoods as part of re-opening those parks. There is a level of investment that is required.

11:50 a.m.

Restructuring consultant Charles Moore just discussed how the city’s Plan of Adjustment addresses the Detroit Department of Transportation. DDOT covered 16 million miles of routes in 2009, he said. That was down to 12 million miles last year.

To cover those roads, Moore said the city currently SHOULD have 230 buses. “Unfortunately, right now, it’s only 190 or so. As a result of that, even though there are routes being driven, when there are not buses available, those riders don’t get picked up,” he said.

Another concern: “The department has numerous safety issues for a variety of reasons,” Moore said. They have been related to: riders assaulting riders, riders assaulting drivers and workers’ compensation claims. Specifically, five drivers have been assaulted. Two of those were stabbed.

Moore testified there are about 30 911s calls made each month by Detroit bus drivers. Cameras on the buses and additional security are planned.

The plan proposes that $100 million is invested in the department and that fares are raised to generate revenue. Currently most fares are $1.50. “This contemplates in a step fashion that by the end of FY 2023 the fare will be $2.50,” Moore said.

Clearing up worker’s compensation claims also should force some cost savings, he testified.

11:36 a.m.

While on the witness stand and questioned by city attorney Robert Hamilton, restructuring expert Charles Moore from the Conway Mackenzie firm walked through some of the public safety improvements and investments provided for in the Plan of Adjustment.

“We turned over every rock in trying to under how the departments are operating now,” Moore said, “and how they might operate better.” That includes analyzing how an increase revenues including procuring grants, including from the federal government, and charging for services including false alarms and other things that cause the departments to make unneeded runs.

As Detroit has 5 times the crime rate when compared to comparable cities, based on FBI statistics, Moore emphasized the importance of improvements in the Detroit Police Department as related to improvements in the quality of life in the city in general. He also addressed what’s proposed for the fire department.

The city’s Plan of Adjustment calls for the following for the Detroit Police Department:

$179 million in additional operating expenses.

$91 million for the “fleet,” in part so that vehicles can be replaced every three to four years

$175 million in technology upgrades including hand-held radios and better integrated communication and computer systems.

$34 million for capital improvements, including new precincts and a new training facility, because the existing one “is in significant disrepair.”

$150 million in cost reductions within the police department. Nearly $88 million of that would come from “labor efficiencies and attrition” in the police department. For example, “Newer officers coming on at the lower end of the pay scale,” Moore testified. It would not be a reduction uniformed officers but in administrative positions.

For the Detroit Fire Department, Moore said the need for improvements is clear: response times were 9 minutes for firefighters and 18 minutes for emergency medical services. The national standard is 6 minutes.

$59 million to be spent on the DFD fleet, which includes replacements of vehicles.

$71 million in capital expenditures that would repair and replace several fire department facilities. Some of the city’s older site don’t accommodate current equipment. Also, “Where firehouses are located is very important,” he said. About $30 million is intended to repair existing facilities. About $20 million would pay for equipment such as boots and coats.

“I know from many discussion with the fire department, this has been a bit of a bittersweet process. Certainly on the one hand, having better equipment, being able to respond and do their job better is a positive, but they also recognize the Chapter 9 process has been difficult on employees,” Moore said. “They recognize it will improve the morale, but they also recognize it has been difficult on employees.”

11:09 a.m.

Restructuring expert Charles Moore is covering blight initiatives, that are provided for in the city’s Plan of Adjustment.

Specifically, he described the comprehensive database done by the Motor City Mapping Project.

And he gave some numbers:

An estimated 80,000 properties are either blighted or showing signs of blight.

It would cost an estimated $850 million to remove all of the blight in the city.

Some $52 million from a U.S. Department of Treasury program that was intended to mitigate the foreclosure crisis will be used to remove blight, as city officials convinced the feds to modify provisions of the program.

Moore also described “blexting,” a mobile app that allows individuals to text in the address of dilapidated structures around the city.

“If they see signs of blight, they can enter it into a database so the city is aware of it and can perhaps take action before it gets too far,” Moore said.

10:06 a.m.

Now on the stand is Charles Moore. He’s a restructuring expert at Conway MacKenzie, a Birmingham, Mich.-based firm that is one of the city’s consultants.

His testimony, based on research and analysis Conway MacKenzie has done since January 2013, largely focuses on projections that show under the Plan of Adjustment, the city would increase revenues by $438 million over the next decade while cutting $358 million in expenses.

He’s being questioned by city attorney Robert Hamilton, who works at Jones Day in the firm’s Columbus, Ohio office.

Meanwhile, here’s the city’s contract with Conway MacKenzie.

9:54 a.m.

Judge Steven Rhodes had questions of his own for Detroit CFO John Hill. Here’s part of their exchange.

Judge: Are you familiar with the city’s plan?

John Hill: Yes I am your honor,

Judge: As the CFO of the city, what would you say are your responsibilities in the city’s implementation of the plan if it is confirmed?

J: I believe that I have a number of different responsibilities in the implementation of the plan. One of the first responsibilities is to take the plan and really translate that into documents and processes that the city can respond to. The plan has utilities built into it, basically three different areas where it is actually uniquely different for the city. One is with people, one is with processes, another is with systems. All three of those things, I believe, are needed to move Detroit to a new future. So my responsibility is to make the plan real by putting in documents and in systems that can be acted upon. And then also to provide information. Accurate, complete, objective information to all of the parties that have an interest in the plan. I view, and I think some of the way that I’m approaching it comes from how I viewed the work that we did in Washington D.C.. Within this plan, there are a number of organizations companies, people who are not being paid what they were owed. No one can argue that question And the plan also allows the city to use some of the funds that would have gone to these other creditors but for the bankruptcy if they were available to invest in systems, processes and people in order to improve the city on a long-term basis and improve outcomes and also to try and put the city in a place where it would be able to pay something eventually to these creditors. It’s kind of the way that I boil it down and I think there is a fundamental responsibility for the city to report exactly what those funds are used for and report exactly what those funds were able to do as a result of being allowed to spend them. That’s how I approach my role. It’s also to make sure that the Mayor and the Council, other decisionmakers in the city have the information that they need in order to make real decisions, not decisions that are made on dated information or information that isn’t complete but decisions that are based on information that has been analyzed and studied and looked at. So the improvement in all of the processes including the creation of the financial planning and analysis group is to create that capacity in the city to use information at much higher levels to make these kinds of business decisions. I’ve also taken on the responsibility that if there’s a hole now that has to be filled at some point in either some of the HR processes or other places in the city, and I don’t have a responsibility for HR but I can’t get done what I need to do without that assistance so I’ve had to create that. So I believe that we can’t let existing structures stop us from moving forward in this plan so my responsibility is to identify all of the impediments associated with implementation of the plan and try and mitigate against those risks. That’s why I say it’s not going to be easy to implement If you go into this thinking it will be, I believe that you will fail.

Judge: That’s a good Segway to my next question which is what challenges do you foresee that you will have in carrying out your responsibilities if this plan is confirmed?

JH: I think the biggest challenge is racing against time. In the District we found that once there was a perception that the crisis was over, it was very difficult to get movement, and so we have to move very, very quickly to put the infrastructure in place and try to make sure that that crisis mentality in trying to get change done continues. The other issue is that this plan calls for a level of cooperation among a lot of different organizations within the government, particularly IT operation. Before Beth Niblock came, I had some concerns about me be in charge of IT as I have told you. … I am not an IT director. She’s one of the best. So it’s getting the resources at the leadership levels in government that can really make the difference … Do you know the mayor actually drove down to Louisville to meet with Beth in the evening and convince her to come here? That kind of dedication to go after the right people in the right places is exactly what I think we need. The work that’s been done by the Emergency Manager so far to help us with grants management in setting up that office of the CFO and all of the support we’ve gotten from the contractor and the people in the city has really given us a head start of what’s in the plan. That also gives me a lot more assurance that we can do this. So it’s the capacity to handle all of this at the same time which we’re working through, and to be able to attract the people and the resources that we will need … to lead this effort ultimately.

Judge: What advice do you have for the Financial Control Board?

JH: One thing that’s already built into the legislation is a close working relationship with the CFO. I think working with the city, the Mayor and the Council to establish at the very start, the type of reporting that is to occur on a regular basis. I would also tell them, don’t hesitate to act. I believe they will be able to keep up with the Financial Review Commission, but I also believe that the pressure will help to keep things on track, and it will be their responsibility to help make sure things are on track.

The other think the Control Board (in Washington DC) did that I think was very helpful to the city and it’s kind of the relationship I have now with the Financial Advisory Board that’s in place, there are leaders that have expertise that I rely on now in order to help with some of the decisions that need to be made. They’re experts in finance, experts in IT, experts in HR. … I met with them, talked with them picked their brains and asked questions. I think being a part of providing that expertise to the city is a major part of the work they would do.

Professional exercise rather than a political exercise, I also weigh more heavily. I understand the importance of politics in helping to solve these issues, but these are tough issues that require people who have deep skills and so the more of those individuals you can have on the board versus the political people, I think the better.

8:40 a.m.

Syncora completed its cross examination of Detroit Chief Financial Officer John Hill. Debra O’Gorman, representing Macomb County, had a few questions, mainly confirming that Hill had limited insights about the Detroit Water and Sewerage Department. (See opening statements for a brief discussion of how that relates to the city’s bankruptcy case…)

On re-direct, city attorney Geoffrey Stewart asked a few questions to counter Syncora’s assertions that Detroit could raise taxes to generate more revenue (presumably to pay creditors what’s owed them instead of erasing debt through the bankruptcy). Stewart also clarified what differences  exist between Detroit and Washington D.C. , where Hill was involved in financial restructuring.

In doing so, Hill mentioned the political dimensions of Detroit’s bankruptcy. His statement (below) has interesting (insulting?) implications for the city’s elected officials.

Here are parts of what Hill said:

In Washington D.C. “Congress acted quickly … The deficits never went as deeply as the deficits went here. Also, the Congress has exclusive jurisdictions over Washington D.C. The citizens of Washington don’t have a vote in the Congress of the United States, so the ability to act without political repercussions from people who elect you was also a factor that helped the Congress move very, very quickly.”

And about the possible effects of raising taxes?

“In some cases increasing tax rates actually lowers taxes. It’s getting into what’s commonly known as a death spiral. And Detroit, which is a highly taxed jurisdictions and also one that is obviously suffering from a long-term economic crisis, I would not at all think that raising the tax rates at this time would be an appropriate strategy here. In the District, although the top tax brackets were raised, there was also relief at the lower end and now the district is looking to lower taxes across the board. And remember, it’s a state and a city so it has state taxes. It has property taxes. It has income taxes. It has any taxes you would have in another jurisdiction. They also lowered the sales tax as well, and so I think it would be very difficult to imagine a scenario where this city would benefit from raising taxes.”