Emergency Manager Kevyn Orr is expected on the witness stand later today but first up is billionaire businessman Dan Gilbert. Judge Steven Rhodes plans to have some motion hearings after Gilbert’s testimony. We’ll have updates throughout the day as city attorneys continue to make their case that the Plan of Adjustment is feasible and reasonable as a guide for Detroit’s exit from bankruptcy.
Here’s more from Orr’s testimony about settlements the city reached with creditors:
*As a component of the state contribution agreement it was very important to state officials that no retiree be “pushed into poverty,” Orr said. So a portion of the Unlimited Tax General Obligation Bonds settlement was used for an “income stabilization fund” that would be used to restore pensions if they were cut below 130 percent of the federal poverty level.
*The Limited Tax Obligations Bonds had an outstanding amount of about $155 million when the bankruptcy petitions was filed. Like the UTGOs, there was a dispute with bond insurers. Here they were Ambac and Black Rock. “Very similar theories (to the UTGO-related litigation), but LTGOs weren’t able to allege a dedicated millage,” Orr said.
The city also defaulted on LTGO payments in October 2013. The insurers sued the city, claiming there were special liens and other guarantees of payment, according to his testimony. “They had competent counsel who could pursue those claims,” Orr said. “They know how to litigate.”
Orr said he knew the litigation would be intense, lengthy and costly with the bond insurers. “They struck me as highly motivated to go beyond the issue here but to drive that home what they perceived to be the precedential value of the issues in this case,” he said.
Settlement negotiations proceeded.
And that’s where testimony ended today.
In his testimony this afternoon, here’s what Orr had to say about some of the settlements reached in the case:
* All but one of the settlements with creditors reflected in the eighth and latest version of the Plan of Adjustment were reached through mediation, Orr said. “I’m still somewhat amazed we reached some of the settlements we have but I’m not sure we would have reached tem without mediation,” he testified
* Valued at about $388 million, the Unlimited Tax General Obligation bonds were a series of bonds issued by the city that “in the creditors’ view” were backed by a dedicated millage, Orr said. “It was a significant sum of money,” Orr said. “We eventually defaulted on our payment in October 2013.”
Chatter, letters and demands with the bond insurers followed “but eventually they sued us,” Orr said. A settlement was reached. But city attorney Greg Shumaker asked Orr what would have happened if one hadn’t been.
“The litigation just out of the box was pretty vigorous, there was a lot of paper flying back and forth,” Orr said. “It was a pretty heated, contested piece of litigation.”
* No settlement has been reached with Financial Guaranty Insurance Company but Orr hopes to have one.
City attorney Greg Shumaker, of Jones Day (Orr’s former law firm), is asking Orr about the city’s Plan of Adjustment, the blueprint for restructuring debt and operating post-bankruptcy.
The plan reflect settlements, restructuring and reinvestment initiatives that “we worked on,” Orr said.
Shumaker asked him who the “we” was.
“I suppose it’s the ‘royal we’,” Orr replied, getting us our first Big Lebowski reference I’m aware of in the bankruptcy trial.
Orr said he didn’t think the city’s 2013 bankruptcy filing should have surprised anyone.
“From my view on July 18, all of those had been firmly established by the people that live here and work here,” he said. “There have been a lot of costs to the city, the issue was ripe, and it was time to move forward to a reasonable plan so we could get out of this.”
After the bankruptcy petition was filed in July 2013, Orr said he was “forthcoming about the financial condition of the city” and he began negotiating with creditors about to try and resolve their claims.
PA 436 (the state’s emergency manager law), Orr said, required him to restore financial and fiscal stability to municipalities in Michigan that are in financial distress and emergency. But he also decided not to use all the powers the law gave him: replacing pension boards, for example, or seeking approval with an election process to raise taxes.
(That’s an issue that’s been raised by creditors during the trial as an option the city should consider so more money would be available to them.)
“We’re at the maximum tax rate and millage,” Orr said, adding the city is nearly at its maximum legal tax rate, has an impoverished population and has a high unemployment rate. So that option “didn’t seem reasonable.”
Orr said early on he met with labor representatives and heard their concerns about wages, pensions and health care. But since the city paid nearly all retiree health care out of pocket and about 40 percent of the city’s expenses went to legacy costs (pensions, health care and debt service), Orr said he had to deal with costs related to employees and retirees.
“We knew that with the current rate of increase, in the next nine years, legacy costs are going to rise 73 percent,” he said. “Retiree health care would be 50 percent of that.”
Orr said the state’s emergency manager law dictated what he did. “We knew the trajectory of where the city was was not sustainable, and the statute required me to put the city in a sustainable fashion at the end of my appointment,” he said.
Orr also described the hostility he faced when he started as the city’s emergency manager, which coincided with the sentencing of former Mayor Kwame Kilpatrick. “The city has gone through a lot of trauma,” Orr said. “There were a lot of rumors about what I was going to do.”
Those included that he was here to sell off assets or “carry out the ill will of Gov. Snyder,” he said. “There were a lot of animosity, some hostility. Some people would tell me pretty straightforward, using vernacular, they didn’t appreciate that I was in town,” he said.
Orr described a group of people who would stand outside his office with packs of Oreo cookies. “My last name is Orr. I’ve heard that before,” he said. “I’d say, ‘If you brought milk, we’d have a snack.’”
In response to a question from a city attorney, Orr described his relationship with Mayor Mike Duggan. “That has evolved from one that was a little standoffish at the beginning…to one that I think is very professional and very respectful of each other,” Orr said.
Soon after his appointment, Orr said he met with hundreds of stakeholders in meetings set up by the state. Some of those included city creditors, and what they said surprised him.
“I guess with the city’s creditors it was the concept of how many were unwilling to come in and do business with the city,” he said. That had a “deleterious effect on the city’s ability to contact or provide services.”
At some point, discussion took place with the city’s vendors about the financial situation of the city and whether creditors would be paid in full. “Each of them felt their situation was special and they would not be required to take a hair cut,” Orr testified.
Orr’s earliest hires as staff in the Office Of the Emergency Manager included a special assistant, a senior advisor, a public relations director. Then, he said, he convinced former City Councilman Gary Brown to become the chief operating officer. He also hired a chief financial officer, a police chief and a deputy emergency manager.
Orr, who took the stand at 2:45 p.m., said public safety was his first focus when he started with the city. Police and fire both had unacceptable response times, outdated equipment and inferior technology.
Next priorities: public lighting, blight remediation and trash collection.
“Our trash services were poor. The city was trying to deal with solid waste on a regular basis but we did not have the capacity to deal with it throughout the city,” Orr said. “In addition to the blight, you would also see garbage in the streets.”
Two private contractors have been hired. The companies have scheduled regular bulk pickups, automated pick up and
“People on the street have come up to us and thanked us for dealing with trash,” he said.
City attorney, Greg Shumaker, of the Jones Day law firm, asked Orr to describe the condition of city services when he took office in March 2013.
“The city’s core provision of services were substandard. The city’s financial situation was obviously in dire straits,” he said. He listed specific departments that faced the biggest challenges: “public works, public safety and health, infrastructure and facilities, planning and development, the parks and rec…were in poor shape.”
Orr also answered a question about the city’s cash flow. “The city was in dire straits also in that respect,” he said. “It had an inability to meet its bills as they became due. Bills as simple as payroll.” There were bounced checks, and it sometimes took 180 days to pay vendors.
Here’s how Kevyn Orr described his current job title in one of his first answers to questions while he’s on the witness stand:
“I’m currently the Emergency Manager for the city of Detroit as recently revised.”
On the witness stand now: Brom Stibitz, director of executive operations at the Michigan Department of Treasury. He’s testifying, so far, about the oversight power the state has through the “grand bargain” legislation. That includes the Financial Review Commission created by the “The Michigan Financial Review Commission Act” and in place for a minimum of 10 years. It becomes operational, according to the Act, the day the Plan of Adjustment is enacted.
The commission is a nine-member panel that oversees Detroit’s fiscal operations including its finances, budgets contracts, collective bargaining agreements, debt issuance and revenue estimates. The commission includes the Detroit mayor, city council president, state treasurer, and director of the department of technology, management, and budget or a designee from any of those people. In addition, the governor has five appointments that will include at least one city resident. One of the five will come from a list provided by the Speaker of the House and one from a list provided by the Senate Majority Leader.
There is a $900,000 appropriation in the Act, which has not yet been spent. The money from last fiscal year, which ended yesterday, will carry forward for the next fiscal year, which begins today.
One position, the executive director, has been created to date, which reports to Chief Deputy Treasurer, Stibitz said. The position has not been filled because state officials wanted the commissioners, when they are appointed, to have a role in hiring the director.
The commission, Stiblitz says, also has to give reviews to the governor reports about the city. They will be posted online.
Here are some of Gilbert’s statements during his testimony:
On the Grand Bargain and why his companies are contributing $5 million to the city’s pension funds:
“If the Grand Bargain is able to help the city get through this bankruptcy faster and get the pensioners more of what they bargained for and saves the art and doesn’t force the art to be sold out of the DIA, I think that’s a triple win for everybody involved,” he said.
On the image of the city as defined by the issue of the Detroit Institute of Arts collection as an asset that could be sold during bankruptcy:
“For the assets of a museum such as that to be stripped and sold in bankruptcy would probably be a blow for the city of Detroit and its image. It’s an overwhelming challenge to change and get positive from everything that’s occurred,” he said. “It would be very, very difficult to get those images and hat concept past almost the public relations side which ultimately affects the economic viability of a lot of things that happen in Detroit … Every day we’re talking to investors from numerous places who come to Detroit, who go on tours, (who are thinking) should they move their offices, businesses, open up an office? Ultimately they all ask about the bankruptcy, and they ask about the DIA: “Are you guys really going to sell off some of that?’”
And more on that:
“An internationally acclaimed institution, such as the DIA, which is probably the single biggest culturally significant attraction in the city of Detroit and is prominent in national and international circles, for the vision or image of that kind of art being stripped and sold in a bankruptcy is an image and vision that I think would be overwhelmingly difficult to overcome, even post-bankruptcy for the effort of trying to get investment into the city and convince others of why Detroit is turned and going in the positive and correct and right direction.”
Let’s catch up with Gilbert’s first bit of testimony. Here’s what he said in answering attorney questions:
* He is chairman of Rock Holdings and Quicken Loans, the second largest mortgage company in the United States. His holdings include 109 individual companies, including two casinos, the Cleveland Cavaliers basketball team and several start-up businesses.
* His companies employ about 12,500 in Detroit, about 80 percent of whom live in the city.
* He has an undergraduate degree from Michigan State University and a law degree from Wayne State University.
* Gilbert, who lives in Franklin, moved his companies downtown because, first, their leases were up in the suburbs and second, he didn’t think the businesses would grow like they should unless they were in the city’s core.
* His company holdings include 60 structures in the city, totaling about 9 million square feet including parking. The cost: about $1.4 billion.
* He has invested in the M-1 rail line, which he expects will be operating in mid to late 2016.
Today’s first witness is billionaire businessman Dan Gilbert who for roughly eight months was the co-chair of the Blight Task Force. He said he was one of the main authors of the 380-page report. Gilbert described the group as focusing on residential blight, vacant lots and commercial properties located near residential neighborhoods.
“It did not include large massive commercial structures such as the Packard Plant or the train station,” Gilbert said.
Gilbert said his involvement in task force began with getting comprehensive information about blight in the city through research and visual inspections. That information was put into a database and connected with 24 other existing databases. “We put all that data together and got a very, very clear picture both from an information side from the databases and from the literal, visual side. We had no guesses any more. We had a very clear understanding of what was there and what was blight,” Gilbert said.
City attorney Greg Shumaker, of Jones Day, asked Gilbert his definition of Blight. “That can be a very vague definition,” he said, “depending on who you are and where you’re coming from.”
“We looked for best practices nationally,” Gilbert said. “We made all kinds of recommendations there.”
Addressing blight is one of the top four concerns for Detroit, Gilbert said, along with jobs, crime, and education. “I don’t believe we can fully address the other three until blight is removed from the city,” Gilbert said. “Blight is like a cancer. Blight grows. In other words, just like a tumor if you take out half the tumor, that’s probably not a great situation, the tumor tends to grow back.”
Blight, Gilbert said, describes homes that are “beyond repair, homes that needed to be taken down, demolished or removed piece by piece,” he said.
The Plan of Adjustment calls for about $440 million to be spent on blight removal in the city over the next decade.