The lineup today includes witnesses Ron Bloom, Sue McCormick, Suzanne Taranto and Michael Plummer.
Bloom, who works for the investment banking firm Lazard Ltd., was the lead adviser to the Official Committee of Retirees in the Detroit bankruptcy case. He served as “auto czar” on the White House Auto Task Force that constructed the General Motors and Chrysler bailouts four years ago.
McCormick is the director of the Detroit Water and Sewerage Department. Taranto is an actuarial consultant who worked on retiree health care costs for the city. Plummer works at Artvest Partners and assessed the Detroit Institute of Arts collection earlier this year. More on that here.
The hearing is scheduled to begin at 8:30 a.m. and run until 5 p.m. We’ll have updates of the testimony throughout the day.
Michael Plummer described the dynamics of the Detroit Institute of Arts in the bankruptcy case as unique in the art world.
City attorney Geoff Irwin questioned him about whether a large museum’s collection has ever been sold or auctioned. “I had never heard of anything remotely close to this ever happening,” he said.
Irwin also asked him about his report, evaluating and valuing the entire collection’s worth.
“Such an evaluation has never been done before of this magnitude,” Plummer said.
Plummer did not finish his testimony today, but he’ll be back on the stand tomorrow. Also scheduled, Annmarie Erickson, the chief operating officer of the museum.
The next witness of the afternoon is Michael Plummer, the founder of Artvest Partners. The New York firm was hired by the city and the Detroit Institute of Arts to “assess the viability and practicality of selling art or otherwise monetizing the collection,” as described last summer by Bill Nowling, spokesperson for Detroit Emergency Manager Kevyn Orr.
Here is the report Plummer authored for the Detroit Institute of Arts.
Plummer is being questioned by city attorney Geoff Irwin, of the Jones Day firm. So far, they’re covering Plummer’s resume.
After the lunch break, Detroit Water and Sewerage Director Sue McCormick answered a few more questions from attorneys about financial projections, the 4 percent maximum annual rate increases and plans to upgrade the system.
Judge Steven Rhodes asked his own questions as well. He asked her about the new Great Lakes Water Authority and its impact on the department’s operation “especially as it relates to continued feasibility to provide water service for our area.”
She replied, “I generally see it as a positive. …. It would allay many of our concerns about access to affordable capital. I also believe based on the structure of the memo of understanding that the ability to help support some of the infrastructure renewals that are required in the city of Detroit without that being an impact on the customers.”
The new authority, for example, will use part of the planned rate increases to pay for capital improvements. Currently, the department borrows money for the entire cost of such projects.
When he asked her about the biggest challenges for DWSD, she said, “Unknowns. The things we don’t know.”
And , she admitted the new Great Lakes Water Authority is going to be a culture change for the department.
McCormick said it will be a “big shift” …with different metro area communities working together for the benefit of one system. The new authority will require what she calls regional planning terms … and she says there is a significant amount of work to be done regarding permits, the system, people and financial planning.
The new authority, for example, will use part of the planned rate increases to pay for capital improvements. Currently, the department borrows money for the entrie cost of such projects.
McCormick also admitted the department has an “undeniable history” but says “substantial progress and trust” has emerged. The new authority, she says is in the best interest of the system, the city and the region.
The current witness is Suzanne Taranto, an actuarial consultant for Milliman who analyzed health care costs for the city’s retirees (and dependents.) Milliman began working for the city in June 2012.
Taranto will be back on the stand after lunch and will continue her testimony. But here’s a bit of what she said this morning, while questioned by city attorney Evan Miller, of Jones Day:
*In 2012, the city had about 17,000 retirees. Of those, about 11,000 were Medicare eligible. The city also covered 8,500 spouses and dependents.
*The city had 24 different health plans for retirees: 10 for Medicare eligible beneficiaries and 14 for those who were not.
*The current liability for retiree health care is about $7.1 billion: about $3.5 billion for general service retirees and about $4.1 billion for police and fire.
The director of the Detroit water department, Sue McCormick spend more than an hour on the witness stand. But there was no discussion of the controversial shut offs. No questions from the city attorney who questioned her, Robert Hamilton, of Jones Day. No questions from any of the creditor attorneys.
A few things of interest from her testimony:
* The City of Detroit and Detroit Public Schools owe millions of dollars in overdue water and sewerage bills. “The city made little to no payment of their utility bills for the year preceding bankruptcy, and they had made, until recently little to no payment on their bill during bankruptcy,” McCormick said. “The school system has been struggling for a couple of years. A year ago, they were $10 million behind…They did enter into a payment. … We still have a bad debt remaining of over $5 million.”
* DWSD’s total budget is about $405 million.
* The Plan of Adjustment provide “adequate levels of funding” to protect the system from a “material risk of failure,” McCormick testified. “Like any system, I think we will almost certainly have failures. We will have water mains break. We will have sanitary sewers fail in very specific areas impacting customers. But a fail for the system overall and its ability to service customers? No, I don’t think so.”
Also related to the bankruptcy case, Judge Steven Rhodes will hold an evidentiary hearing on Monday about whether he will temporarily halt the shutoffs of water service for Detroit residents with unpaid bills. He previously ordered parties to mediation in the dispute.
In March, the Detroit Water and Sewerage Department began shutting off service to customers — eventually about 15,000. The shutoffs were halted for a month during the summer while the department informed customers about payment plan options.
Other than the water-related hearing, bankruptcy court will be postponed next week so creditors can respond to the new Plan of Adjustment, filed this week, the Syncora settlement and the formation of the Great Lakes Water Authority as part of the restructuring of the water department.
Early in the negotiations, Bloom testified, the Official Committee of Retirees (OCR) determined that pensions would be the priority over health care, partly because of legal arguments, partly because of the emotion attached, Bloom said. “Our initial position as the pension should remain untouched in its entirety but pretty early on we signaled that we could see compromise in the OPEB (other post-employment benefits), the health care,” Bloom said.
Barnowski also asked Bloom about how interested the OCR was in the overall revitalization of the city.
“We were relying on the city of Detroit to be there to honor these promises out into the future,” Bloom said. “The reality is as we observed, when you get yourself in bankruptcy, bad things happen. So we were, whether we liked it or not, betting on the city. The revised promises the city would make, whatever they would be, would pay out very time. We had to have belief that revitalization would occur.”
Bloom also said the political dimension of the bankruptcy has been apparent throughout his work with the case, and all parties have been keenly interested in the city’s long-term revitalization.
“This is a political environment. The city is a political entity. There are many stakeholders who are political entities who were involved in this case, whether that being the other counties, the state of Michigan itself and our perception, the committee’s perception, was that they had a keen interest in revitalization as well,” Bloom said.
As the first witness on Day 10 of the city’s bankruptcy trial, Bloom is being questioned by Dan Barnowski, an attorney for the Official Committee of Retirees (OCR), a bankruptcy court group, separate from other employee or retiree associations, labor unions or pensions systems.
Bloom described his work on the auto task force as involving a high ratio of retirees to active workers. For General Motors, Bloom said, there were roughly 10 retirees for each active member while at Chrysler it was 6 or 8 to one. The City of Detroit currently has about double the number of retirees for each active worker.
The OCR, Bloom testified, took its role very seriously as it members and their claims for pensions and lifetime health care costs represented a large amount of the city’ $18 billion debt.
“We viewed ourselves as representing by far and away the largest creditor interest … roughly 80 percent of the claim amount of the total unsecured claims amount in the city,” Bloom said. “We viewed ourself as a very significant stakeholder in the matter and an important creditor and we believed that we have very valid and important claims. Relative to our claims, I think in general our relationship with the city was professional.”
Before the bankruptcy petition was filed in July 2013, Bloom said the committee representatives objected to what the city had in its early plans for the case.
“The plan was not something we thought was remotely fair to the retirees, and so we had a pretty vigorous disagreement about how we thought the case should go. We took the position that the city didn’t belong in the bankruptcy court at all. We took the position that the pensions were constitutionally protected. We took the position that when the city tried to manipulate .. the retiree health care, that that was inappropriate and not consistent with the law. … We had a pretty serious disagreement at least from where the city started and from where we started.”
But the months of negotiations and Judge Rhodes’s ruling that the pensions are not constitutionally protected in bankruptcy led to movement on both sides, Bloom said.
Barnowski asked Bloom if he thought the city had shown favoritism to the retirees as compared to other creditors. Bloom replied no.
“We felt like we had very significant claims her both legal and political. We felt we were 80 percent of the claim amount and that justified a significant, some tension to our concerns,” Bloom testified. “We felt we had very strong legal arguments as the other protection of our position. We had been ruled against on that but we were appealing. We felt like we got the best we could get but in no sense did we view that as favoritism.”