Day Eight: Detroit’s Bankruptcy Trial

Day Eight: Detroit’s Bankruptcy Trial

After a three-day postponement so the city and some of its creditors could negotiate, Judge Steven Rhodes is back on the bench. Here’s what’s happening in the courtroom today:

4:05 p.m.

Another actuary is on the witness stand. It’s Alan Perry, from Milliman, the city’s actuary firm that analyzes pension financing. He’s being questioned by city attorney Evan Miller, who works out of Jones Day’s Washington D.C. office.

4 p.m.

Most of the day in court was, well, not the most headline-generating. But here are a couple other media reports about what happened earlier to catch you up.

First, the day opened with Syncora confirming it had reached a settlement with the city and reviewing some of the details of the deal. Bloomberg Reporter Steven Church wrote this piece, which ran on the Washington Post’s website.

Throughout the day, the Detroit Free Press live blog is updated constantly, in a Twitter-like fashion but with longer posts, and can be found here. Reporter Matt Helms will answer your questions too if you post. From The Detroit News, the latest stories and Tweets from Robert Snell and other reporters can be found here.

3:13 p.m.

Kopacz’s task was to determine the feasibility of the city’s Plan of Adjustment. But first, she testified, she developed a definition for “feasibility” for this case.

“Is it likely that the city of Detroit, after confirmation of the Plan of Adjustment, will be able to sustainably provide basic municipal services to the citizens of Detroit and meet the obligations in the plan without the probability of a significant default?” she said.

She based her analysis of the plan on that….and she’ll update her expert report after the city files its next Plan of Adjustment, expected later today.

2:44 p.m.

Before the trial witnesses resumed testifying this afternoon, Martha Kopacz took the stand. She’s the court-appointed expert witness hired by Judge Steven Rhodes to help him determine whether the city’s Plan of Adjustment is feasible and what challenges it might present. Here is Judge Rhodes’s order appointing her. Kopacz works for Phoenix Management, a Boston-based restructuring firm. To day, Judge Rhodes has authorized about $1.2 million in consulting fees and expenses for Kopacz and her team.

Today’s hearing was needed to address motions made by creditors challenging some of her credentials as an expert witness and seeking to exclude portions of her testimony. Two bond insurers previously had challenged Kopacz’s qualifications and expertise but they dropped them after Syncora reached a tentative settlement with the city.

UPDATE: Here’s what the judge eventually decided.

The city’s pension systems continue objecting to her testimony as it related to pension issues. “It exceeds the scope of her engagement under the Appointing Order,” attorneys for the pension system wrote, “Kopacz admits that she lacks special knowledge, training or education regarding public pensions.”

Judge Rhodes spent nearly an hour reviewing her background and experience. He also asked her about her understanding of today’s hearing.

“We’re here today because the retirement systems have an objection, and I don’t mean that in a legal sense, but there are a couple paragraphs in my report that they really don’t like,” Kopacz said. “This is not my testimony as to my opinion. In terms of what I did or didn’t do, I know there were objections raise as to not doing enough or doing too much or something like that.”

He also asked her about her experience with public pensions.

“I will never say that I like it but you can put your head in it and you can understand it when you have to,” she said. “There are some things that are very complicated about it but at the end of the day, it’s about obligations. It’s about investments. It’s about finance, and that can be understood by most people as long as someone is willing to teach you about it.”

Kopacz said today she “ultimately” got what she needed from the city but didn’t get all the documents or information she wanted. “I can’t even count how many documents we looked at,” Kopacz said.

In May, her attorney filed a letter with the court stating, in part, that the city’s accounting firm, Ernst & Young, was not providing her with complete financial information about the city. Kopacz wanted the information on which the city is relying to make multi-year financial projections.

12:15 p.m.

One of the actuarial consultants, Glenn Bowen,  who reviewed the city’s pension fund performances and forecasts spent nearly two hours on the witness stand. At the end of questioning by city and creditor attorneys, Judge Steven Rhodes had some questions of his own. Here are a few and Bowen’s response.

Judge: Addressing the investment return assumption, is there one correct assumption that should be applied like everywhere or is it fair to say that there is an acceptable range of such interest rate assumptions?

GB: To specifically answer the first part, there is definitely not one assumption and to the second part, we believe there is a range of reasonable assumptions but it is not an absolute range. It varies by plan.

Judge: What are the factors that impact where within a range a pension plan would choose its investment return assumption?

GB: … The concept is when the actuary gets done or the actuary gets done with doing their mechanics … we should recommend a range in which the rate of return is more likely than not to fall. … We recommend to the sponsor that is our expected range based on your particular asset allocation. Where the plan sponsor decides to fall within that range depends upon their tolerance for risk.

Judge: That issue, the issue of the sponsor’s tolerance for risk, is that something that the actuary makes a recommendation on or actually gets involved in helping the client to assess?

GB: That’s not something that the actuary recommends and from the standpoint of assessing … The lower investment return you assume you’re going to have over time, the more cash you’re going to put in up front.

Judge: Is it the role of an actuary for a plan sponsor ever to say to the sponsor, “Under the guidelines that we as actuaries use, you should not use the investment return assumption that you have chosen to use”?

GB: I would say it’s close to that, not exactly. … The trustees for the system, are free to choose their rate of return. … To the extent we feel it’s outside of the range of responsibility, we have a duty to disclose it.

Judge: Did you ever say to the city here that the city and this pension plan should not chose 6.75 percent?

GB: We did not.

10:16 a.m.

The resumed making its case to Judge Rhodes about why the Plan of Adjustment should be confirmed. The first witness of the week is Glenn Bowen, a principal and consulting actuary with Milliman, the actuarial firm the city used to evaluate the Police and Fire Retirement System and the General Retirement System.

(As will come up in later testimony, the systems also had an actuarial firm, and the Official Committee of Retirees, the group mandated by bankruptcy law, used a third firm to evaluate pension system investments, forecasts, funding needs and other issues.)

10:04 a.m.

Judge Rhodes concluded that creditors who want a delay in the trial to respond to the Syncora settlement deserve some time to prepare. But he left it to attorneys to determine how much and we’ll find out this afternoon what they come up with.

Here’s what the Judge said:

As the Court discerns the motion for adjournment here, there are three relatively distinct grounds for it, and the issue before the Court is whether these grounds constitute extraordinary cause of the delay or continuance that is sought here. The three are that the Syncora withdrawal from the defense of the city’s case causes FGIC and the other objecting parties, mainly the Macomb Drainage District, to take over those parts of the defense that (Syncora) had taken responsibility for in the division of labor. The second is the strong potential for FGIC to need  to retain experts that Syncora had retained or maybe it’s only one. So that it can properly pursue its defense of the city’s case in the absence of Syncora and its experts and the third is the potential need to file supplemental objections to what will be the 7th amended plan to be filed here promptly along with any potential need for additional discovery relating to those supplemental objections to the amendments in the plan.

The Court must conclude that the first two of those asserted grounds do not constitute extraordinary cause for any adjournment and to the extent the motion is based on those two grounds, it is denied. There is merit in the city’s position that Syncora’s negotiations with the city over the past several weeks have been well known, and in those circumstances it seems to the court that it was incumbent upon all of these parties, consistent with their obligations to their clients, to prepare for the contingency that in fact Syncora might settle at some point, and that preparation would have include necessarily preparation to take over for the examination of the witnesses that Syncora was going to cover and, absent of an agreement regarding experts, locating experts.

In this regard the court will also note parenthetically but importantly that nothing in FGIC’s motion or its presentation today identified any steps that FGIC took in regard to cross examination preparation or locating and preparing an expert since the agreement in principle was announced last Tuesday night or addressed how those five days was insufficient to meet its preparation needs. On the other hand, the Court must conclude that the city’s filing of an amended Plan (of Adjustment) incorporating its settlement with Syncora does require the court to accommodate the interests of FGIC and the Macomb Drainage District and other objecting parties to have an opportunity to examine that plan or the amendment to it and to file supplemental objections to that plan as they deem appropriate, to take discovery as necessary in relation to that and to prepare to address the Syncora settlement as part of this confirmation hearing. Having said that, however it’s less clear to the court how the details of that should play out and so accordingly I’m going to ask counsel for FGIC and Macomb and any other objecting creditors to meet and confer with counsel of the city to see if you can come to some agreed upon schedule or plan that will accommodate the interest of the city in the prompt as possible resolution here and in the objecting parties interest in adequate opportunity to address the news plan and perhaps we can do that over the lunch hour and let the court know where you stand at that time.

I think that’s as much as we can do on that now and I will ask the city to proceed with its case.

9:38 a.m.

Before the confirmation hearing continues, attorneys for the city presented terms of their deal with bond insurer Syncora, first reported last week.  It includes a fractional payment of what the insurer is owed for a pension financing deal, leases on parking lots and the Detroit Windsor Tunnel and credits toward future purchases of property from the city.

The deal also will require the city to file a new Plan of Adjustment, which attorneys say will be done today. Two creditors, bond insurer Financial Guaranty Insurance Company and Macomb County, asked the judge to delay the trial.

FGIC attorney Alfredo Perez said the bond insurer needs time to prepare an objection to the new plan as well as an additional expert report. He also said “one or two depositions” would be needed. “We really wanted to ask for two weeks in our motion last night but we decided that probably wasn’t do-able,” Perez said.

“There’s a new, very complicated deal that Syncora has entered into, which needs to be analyzed by all the parties to determine what objections they may have,” said Allan Brilliant, attorney for Macomb County.

Several creditors filed a motion Sunday evening asking for a delay in the trial.

Judge Rhodes is deciding whether to grant the delay request.