Day 12: Detroit’s Bankruptcy Trial

Day 12: Detroit’s Bankruptcy Trial

After nearly two weeks off so creditors could react to settlements reached in the case, Detroit’s bankruptcy confirmation hearing resumes today. Up first on the city’s witness schedule: financial analyst Gaurav Malhotra. Emergency Manager Kevyn Orr is scheduled for later this week…perhaps as early as tomorrow.

4:57 p.m.

Court is concluded. The first witness tomorrow will be Ken Buckfire, of the Miller Buckfire banking restructuring firm, followed by Vyto Kaunelis, a consultant with Ohm Advisors, an environmental, architecture and planning firm, and Detroit Emergency Manager Kevyn Orr.

4:21 p.m.

Under questioning by Ed Soto, an attorney for bond insurer Financial Guaranty Insurance Company, which has a roughly $1.1 billion liability in Detroit, Malhotra said he had not considered privatizing services or selling art from the Detroit Institute of Arts collection to raise revenues for the city in doing his financial forecasts.

Malhotra also said Ernst & Young will continue to consult for the city until December 2015. They work on financial forecasting and human resource systems.

3:04 p.m.

A few more tidbits from Malhotra’s testimony:

*The $194.8 million the state will put into Detroit’s pension funds will be split nearly evenly between the two funds: $96.0 million to the Police and Fire Retirement System and $98.8 million to the General Retirement System.

*Without restructuring, the city would have been putting about 26 percent of its annual budget toward retiree health care by 2033, Malhotra said. The bankruptcy plan reduces that amount to between 2 and 4 percent.

*Under questioning from city attorney Geoff Stewart, of the Jones Day firm, Malhotra said Detroit’s future budgets will comply with new state law that requires municipalities to set aside 5 percent of previous year’s expenditures. “Based on these assumptions, the city should be able to maintain a cash balance consistent with these assumptions,” Malhotra said.

2:17 p.m.

Malhotra is continuing to testify about the financial impact of settlements. For example, the city is reducing its obligation for retirees’ health care from about $4.3 billion to $450 million. A $450 million note will be issued and Voluntary Employee Benefit Associations will administer health care both for police and fire retirees and general service workers.

“The city is not exposed to OPEB (Other Post-Employment Benefits) any longer beyond the commitment that it’s making,” Malhotra said. “The city’s obligations are limited to its servicing the B notes.”

Malhotra also said the city has outlined some terms of a settlement to bond insurer Financial Guaranty Insurance Co. (FGIC).

“FGIC has an option to opt in to a similar or the same settlement as Syncora but I don’t know all the details,” he said.

11:01 a.m.

To create revenue projections, Gaurav Malhotra said he relied on the work of several experts and documents, including Robert Cline, Caroline Sallee, the Ernst & Young Restructuring Team, Charles Moore, from Conway MacKenzie, Ken Buckfire, from Miller Buckfire, and the Plan of Adjustment, specifically the “Grand Bargain” funds. All of the people have or will testify in during the bankruptcy trial.

To create expenditure forecast, Malhotra said he worked with mainly the same experts as well as city officials to determine the city’s operating and legacy costs.

Here is his expert report.

10:35 a.m.

Now testifying: Gaurav Malhotra is principal and senior managing director in the restructuring practice at Ernst & Young in Chicago.  His initial role when he began working with Detroit three years ago was to assess the city’s short-term cash flow situation. In Spring 2013, Ernst & Young’s role changed to look at longer-term financial projections for the city.

The city has paid more than $20 million to Ernst & Young, according to Malhotra, with the bulk of that during the bankruptcy. Since the bankruptcy petition was filed, the city has withheld 10 percent of Ernst & Young fees. But if the Plan of Adjustment is confirmed by Dec. 31, the city will pay the 10 percent, Malhotra said.

Best Tweet about Malhotra came from Rob Snell, of The Detroit News.

10:30 a.m.

Before the trial resumed, Judge Steven Rhodes heard a motion that would have allowed Robert Davis and a group called “Citizens United Against Corrupt Government” to pursue a lawsuit in state court against the city for an Open Meetings Act violation based on how the city council conducted its talks regarding Emergency Manager Kevyn Orr’s transition. After short oral arguments, Rhodes granted the motion and will allow the lawsuit to proceed.

“There are certainly aspects of the claimed violations of the Open Meetings Act that are moot but it appears that there are aspects that are not moot,” Rhodes said. “For example, the motion states that if the circuit court were to find a violation of the Open Meetings Act, the plaintiffs would seek disclosure of certain materials relating to the closed meeting such as minutes, transcripts, etc.”

Rhodes also dismissed the city’s argument that the request was frivolous.

“The claimed violations of the Open Meetings Act is not a frivolous claim. If it were, the Court would not grant relief from the stay since no party should be required to defend a frivolous action. The claim is not frivolous. The city has a defense to it, perhaps even a strong defense, but the claim itself is not a frivolous claim,” Rhodes said.