Day Five: Detroit’s Bankruptcy Trial

Day Five: Detroit’s Bankruptcy Trial

The city has had three witnesses on the stand today, so far, as the bankruptcy trial moves into its second week.

First Charles Moore returned to the witness stand. He’s a restructuring expert with the firm Conway MacKenzie, one of the city’s financial consultants that did revenue and expenditure forecasting. On Friday, he was questioned on direct examination by city attorney Robert Hamilton, of the Jones Day firm. Then attorneys for some creditors cross examined him: bond insurer FGIC and Oakland and Macomb counties. Today began with cross examining from Jamie Fields, who represents several employees, retirees and beneficiaries, according to court filings.

After Moore finished, city Chief Information Officer Beth Niblock testified for nearly two hours. She was followed by Caroline Sallee, of Ernst & Young, who did tax revenue forecasting as a city consultant.

5:04 p.m.

Testimony is complete for the day, with Syncora attorney Douglas Smith in the midst of his cross examining of the city’s witness Caroline Sallee.

In rapid questions, he started out by asking her everything she is not an expert in: real estate, revenue projection, tax collection, accounting. Basically Syncora continues to attempt to proverbially poke holes in the city’s testimony and evidence relevant to revenue forecasting. If Syncora can show revenue will be higher, it can argue for more money to creditors.

4:39 p.m.

Caroline Sallee remains on the witness stand being questioned by a city attorney. Here are a few items from her testimony in Detroit’s bankruptcy trial about how she calculated tax revenue projections:

*The city will continue to see population declines for 40 years.

*Detroit’s population is currently about 7.2 percent of Michigan’s total, and that is expected to drop to 6.3 percent by 2020.

*Residential properties account for about half of the city’s parcels, while commercial properties are about a quarter. Since 2007, home values in the city have decreased by 63 percent.

*Even if Detroit’s real estate value increases, it won’t mean a revenue windfall because of state law regarding tax collection on the assessed (taxable) property value. “Assessment would follow the market but your taxable value would be restrained. … the taxable value is like you’re carrying a weight. It goes up more slowly (because it’s capped every year by state law). It can only grow at the rate of inflation or 5 percent, whichever is less,” Sallee said.

*After the city finishes its citywide property appraisal, she predicts a value drop, with property values in 2019 being half of what they were in 2012.

*Population decline becomes “less negative” over time. “Employment trends follow that too,” she said.

3:01 p.m.

As a manager in Ernst & Young’s Quantitative Economics & Statistics practice Sallee was responsible for creating the City’s 10- and 40-year property tax and state revenue sharing projections. Here is her report.

Under questioning by city attorney Geoffrey Stewart, from the Jones Day firm, Sallee explained the five steps she used to forecast Detroit’s general operating property tax revenues:

1-Forecast taxable value by property class.

2-Select the tax rate. (For Detroit it’s 19.25 mills.)

3-Calcluate tax levy.

4-Adjustment for legal and policy changes.

5-Apply an effective collection rate. (For Detroit, it’s about 50 percent on residential properties.)

“For a residential property there’s a number of reasons they’re not collecting,” Sallee said. Tax bills may be sent to the wrong property, people may refuse to pay or be unable to pay. “What we’ve seen in the data, there are fewer residential payers but it’s much higher for commercial payers,” she said.

2:27 p.m.

After about 90 minutes of questioning by a city attorney, creditor attorneys got their chance with city Chief Information Officer Beth Niblock.

Under cross examination from bond insurer Syncora attorney Stephen Hackney, Niblock admitted she has fewer employees, including contractors, in Detroit than she did in her previous job in Louisville. She also said she’s expressed concerns that there are too few resources to accomplish the city’s technology improvements included in the Plan of Adjustment, but that they are needed.

“The hope is improving the IT systems will improve everybody’s ability to do their jobs,” Niblock said.

2:14 p.m.

City CIO Beth Niblock began testifying after lunch about planned initiatives to upgrade technology for city employees and operations. She called them “reasonable” and said they would address many of the current needs.

Chief Financial Officer John Hill, who testified last week, is overseeing the adoption of a new financial management/human resources system. Court documents put the price of that at $26.2 million.

Niblock says another 75 IT initiatives are taking place throughout the city’s departments with “the bulk of them” happening in the police, fire and human resources departments.

As far as specific areas to address, Niblock, under questioning from city attorney Robert Hertzberg, here are some of the initiatives Niblock identified and what she said about them:

Microsoft Application Update, estimated at $13.5 million. City employees currently work on several different versions of Microsoft office products. Updating the software would allow, for example, employees to better share documents because they would be using the same version of a product.

Data Center Back Up, $10.9 million. “We need to have a supplemental back ups center so that we can put servers and have equipment to have redundancy and resiliency in the network.”

Hardware upgrade, $11.7 million. This include modern desktop and laptop computers. “It will also address the network hardware. We have old routers and switches on the network that need to be updated,” she said. Additional server and storage upgrades are included.

Citywide imaging and document arrangement, $5.4 million. The city currently store paper files, but this initiative would allow electronic record keeping.

Worktrain upgrade, $3.6 million.

Citywide network infrastructure, $4.2 million.

Active directory service migration, $2.0 million.

ERP system maintenance, $2.8 million.

Helpdesk Structure, $2.0 million.

Operating System Upgrade, $1.0 million.

SQL Server Support, $700,000.

12:05 p.m.

Detroit’s Chief Information Officer Beth Niblock testified about the horror show that is the city’s technology infrastructure:

The weekend power outage took out the city’s data center. Code has been in place for 25 years. Software is generations behind. Antiquated desktops take 10 minutes to book. Email is atrocious. She loses sleep over the city’s payroll system.

Court is on a lunch break now, but I’m expecting some afternoon testimony about how the city’s Plan of Adjustment and its proposals to invest in technology will help city services run more smoothly and eventually save money.

10:55 a.m.

Detroit chief information officer, Beth Niblock, took the stand at 10:50 a.m. She is currently being questioned by city attorney Robert Hertzberg, of the Southfield law firm of Pepper Hamilton. They are covering her education and career history.

Niblock left the city of Louisville in February for the Detroit position after Mayor Mike Duggan drove to Kentucky and convinced her to move to the Motor City.

10:22 a.m.

When attorneys had finished questioning Moore, Judge Steven Rhodes spent nearly 40 minutes asking questions and hearing Moore’s answers. Some related to Conway MacKenzie’s contract with the city. Moore said the current contract runs out at the end of this month, but talks are taking place to extend it. Rhodes asked about what those discussion entailed.

“Our goal from the beginning, and especially right now, is to have it set up so that the city can operate without our involvement. It’s very clear, and I certainly don’t like to speak on behalf of others, but I think Mr. Hill (the city’s chief financial officer who testified last week) has indicated we have not gotten to that point yet. So what we’re specifically talking about is when is that point and how do we get to that point,” Moore said.

Rhodes also asked about Moore’s meaning use of the phrase “cultural deficiencies” during his direct examination.

Moore’s answer: This is something that the court’s expert touched on and I agree with. There are pockets, way too many pockets within the city, that don’t necessarily feel that it is their responsibility to provide a certain level of service, that it kind of goes the other way around: people are there to be served. From that standpoint, it’s ingrained in the culture in many areas of the city within certain departments, that people don’t have to perform to a certain level. … The lack of resources to track and monitor how individuals and departments are performing has contributed to that, and there’s no question that all of the budget cuts that have been realized have left people somehow helpless … people not understanding or perhaps not feeling that they have to perform to a certain level and not having the management or leadership that holds people accountable.

10:15 a.m.

Moore estimates that fraudulent workers’ compensation claims total about $35 million annually with about $14 million within the Department of Transportation.

Judge Steven Rhodes questioned Moore about how fraud, waste and abuse might be reduced within the city because of provisions of the Plan of Adjustment.

“Within many of the collective bargaining agreements, the new agreements that have been struck, there are significantly more management rights that have been built in,” Moore said. “That will be an important element as well as having the right, qualified people in the management roles to carry that out.

As part of the bankruptcy negotiations, the city and several employee groups reached five-year contracts. Some information about those is here.

9:39 a.m.

Moore on Friday offered as an example of how the Annuity Savings Fund investment program benefited city workers one particular retiree who invested about $100,000 and received a $1.4 million payout after 42 years of employment. That amounted to an interest rate of 13.6 percent, he testified.

Under the bankruptcy’s Plan of Adjustment, if approved, the retiree’s repayment amount would be about $120,000, which leaves a roughly 13.2 percent interest rate over the life of the annuity.

9:16 a.m.

The first two people cross examining Moore, Jamie Fields and John Quinn, focused largely on the facts and assumptions Moore used to calculate and forecast related to the Annuity Savings Fund. That’s a program that allowed non-uniform city employees (everyone but police and fire) to invest 3, 5 or 7 percent of their after-tax income in a fund co-mingled with the general pension funds. The annuities had a guaranteed rate of interest regardless of how the fund actually performed.

As part of the bankruptcy negotiations between the city and creditors, several employee and retiree groups agreed to allow a partial recoupment of “excessive” interest payments on the annuity savings fund. The provision was in the plan that the pensioners approved in their vote on the Plan of Adjustment. The recouped funds would be put back into the pension fund to make up what the city calls “excess interest payments” made to pensioners who have collected their annuity savings funds.

Fields, a Detroit-based attorney, represents a group of employees, retirees and beneficiaries. Here is one of their objections to the Plan of Adjustment. Quinn has filed multiple objections, including this one, and dozens of retirees have filed joinders supporting his arguments.

  • John Quinn

    Minor correction to the 9:16 a.m. entry. Quinn (That’s me.) has filed
    one document sating objections, and it contained only two objections. it
    is Doc. No. 5723.