Day 15: Detroit’s Bankruptcy Trial

Day 15: Detroit’s Bankruptcy Trial

Detroit Emergency Manager Kevyn Orr returns to the witness stand in the city’s bankruptcy trial today, and according to city attorneys, he could testify most of the day. We’ll have updates here with highlights of this testimony. Here’s what he said yesterday.

5:00 p.m.

Court is in recess until tomorrow, when Orr will return to the stand. Roger Penske is also expected to testify.

3:56 p.m.

Orr is being questioned about several interviews he did with local media, including this one with our Detroit Journalism Cooperative partner The Michigan Citizen.

3:45 p.m.

Attorney Ed Soto, who represents bond insurer Financial Guaranty Insurance Company, is first to cross examine Orr. FGIC, with roughly $1.1 billion in claims, is the largest creditor without a settlement with the city. The Plan of Adjustment calls for paying them roughly 6 cents on the dollar.

Soto began by asking questions about the city’s different treatment of classes of creditors in the Plan of Adjustment, specifically that pensioners lose less than financial creditors like FGIC.

3:36 p.m.

After a short cross examination, Kresge CEO Rip Rapson is finished testifying. Creditors attorneys now will cross examine Kevyn Orr.

3:25 p.m.

Because of scheduling issues, creditors’ attorneys postponed cross examining Kevyn Orr this afternoon, and Rip Rapson, the chief executive of the Kresge Foundation, is on the witness stand.

Kresge, he said, has invested about $1.4 billion in Detroit in grants and direct funding for programs, personnel and projects including the Detroit Future City planning initiative. That commitment will continue. Kresge has pledged $100 million toward the “Grand Bargain” that funds pensions and protects the collection at the Detroit Institute of Arts from sale.

City attorney Greg Shumaker questioned Rapson about why the foundation officials believed the DIA was worth such an investment.

“Its’ one of those defining institutions of Detroit life,” he said. “The contribution to the grand bargain is above and beyond what we would normally spend.”

1:55 p.m.

Detroit City Council members are not calling Orr as much as they used to, he quipped during his testimony. But he described positive working relationships with them.

“With most of the council member I’d like to think it’s quite good and personable,” he said.

He also repeated his earlier testimony describing a good relationship with Mayor Mike Duggan, including talking about what would happen when Orr’s tenure is up.

“We had a long series of discussions about transition. Frankly for the last nine months he’s supported me on restructuring side and I’d like to think that I’ve supported him with operations,” Orr said of Duggan.

1:39 p.m.

“Why not sell the city’s assets and increase creditors’ recovery?” city attorney Greg Shumaker asked Orr when court resumed after a lunch break.

“For several reasons. I believe that under the statute, both the state (emergency manager) statute and the federal law, I’m not required to sell assets. We leased assets: Belle Isle, which required approval, and we have liened assets for financing, which requires approval. But we haven’t sold anything. I believe for the city come back, it needs the assets that it has. It’s not as if the city has a great number. Some are notable, the DIA for example, but I believe we’ll need those assets, particularly the DIA, as it’s one of the most important cultural institutions in the city,” Orr said.

Shumaker asked what could be sold.

Orr answered: 380 parks, the Detroit Zoo, the Michigan Science Center, four golf courses, a cemetery. “But we haven’t sold any of those,” Orr said.

11:55 a.m.

Orr said the Plan of Adjustment seeks to improve city services simply to reach acceptable levels in national standards. “We are not trying to reach gold-plated service levels,” he testified.

Provisions of the $1.7 billion provided over the next decade to improve infrastructure and city services will be focused on updating and improving procedures and systems to save money but also to make “compliance” easier. For example, Orr described how he saw people waiting four hours to pay tax bills. “When you have a barrier to compliance like that, that means you’re going to get noncompliance,” he said, meaning people won’t wait that long to pay bills.

“You want to put out restructuring initiatives that help people comply if they want to. You want them to get fair service for their taxes,” he said. “You want to make sure the city works in an adequate way, the way it should, in a way they’re expecting so that they themselves are willing to comply.”

11:35 a.m.

Part of Orr’s testimony covered a mini comparison of pensioners and financial creditors and how they were treated in the Plan of Adjustment — how their claims were reduced — and how Orr concluded, partially, how much they should be reduced.

“When I look at the expectations of the relative parties, I’m well aware that financial creditors have processes, procedures, due diligence, underwriting, analysis, access to ratings agency reports and property reports relative to debt issuance and have a better capacity to handle the risk … as opposed to the average individual or work of the city,” Orr said.

City attorney Greg Shumaker asked why it was important to understand that dynamic.

“You’re trying to understand or at least trying to balance competing interest as best you can,” Orr said. “No one said there was an unlimited pot of money. Everybody agreed had limited assets to pay these obligations.”

But he said he balanced what “access” to information about risk, interest rates and other “costs” related to debt different parties had. Sophisticated financial creditors had more. Pensioners had less.

“The average worker doesn’t have that ability to price the cost and the risk or build into their instrument certain recoveries as those risks rise up. The average worker just expects to be paid,” he said. “They were going to receive their pensions. That’s what the city had promised, that’s what the system had promised, that’s what the state constitution had promised. Many of them had no reason to believe that was not going to occur and they had planned their affairs on that basis.

Shumaker asked Orr how pensioners viewed the city’s pension obligations.

“They felt very strongly they had to be protected and observed,” he said.

10:36 a.m.

The Syncora settlement, which came just last month, was significant Orr said. The deal reduces by about three-quarters the Bermuda-based bond insurer’s roughly $400 million. It also, Orr testified, negates several Syncora legal actions and suits related to the Detroit bankruptcy that eventually could have cost the city up to $10 million.

“It was costing the city not an insignificant sum of money to defend those claims from that litigation,” Orr said. “I expected them to go, on appeal, all the way up to the Supreme Court. I expected it to go on for years.”

The settlement involves a cash payment, some city property, a parking garage and an extension of the lease for a Syncora subsidiary for the Detroit Windsor Tunnel.

The development agreement, which is part of the settlement, gives Syncora 15 months to develop several parcels of property along East Jefferson near the Detroit River, and construction needs to be completed within three years.

“It has an option for Syncora, and this can change, to have access for certain option prices for certain pieces of property along the East Jefferson-River corridor,” Orr said. He expects parking and residential development there.

Syncora also would spend $13.5 million to develop the Grand Circus Park parking site. After recovering that cost of capital improvements to the garage, Syncora would pay the city 25 percent of its parking revenues.

Orr said Syncora has experience operating “subterranean” sites, such as the tunnel, so it made sense for the city to allow them to acquire and operate an underground parking garage.

10:04 a.m.

Before the morning recess, Judge Steven Rhodes announced how much time each side has left to make its case in the Plan of Adjustment confirmation trial.

The city has 31 hours and 45 minutes. The objecting parties have 54 hours 3 minutes.

The amounts represent reductions of 4 hours for the city and 10 hours for creditors, possible because of settlements reached since the trial started.

“The court has observed that both sides have been very crisp and efficient in presenting their case, which the court appreciates,” Rhodes noted.

9:55 a.m.

Orr testified there were practical, legal, economic and symbolic reasons to have certain classes of creditors support the Plan of Adjustment.

Having the city’s pensioners vote in favor of the Plan of Adjustment, he said, was important in part to avoid a “cramdown” scenario in which the bankruptcy court judge could “force” the plan through and, in part, to make it easier to confirm it.

“It was also important to get buy-in from the pension and the retiree health care class because as I said before, we were trying to develop a consensual plan here in the city. The city has had enough kind of conflict and strife. When we, meaning the restructuring team, leave, we’d like to leave the city in a position that parties believe they had a voice in this process,” he said, “and there’s buy-in going forward.”

9:44 a.m.

Here’s more on the “Grand Bargain,” from Orr who is on the witness stand and revealed a bit about Lansing politics…and a lack of faith in the future.

The state contribution to pension funds was proposed by Gov. Rick Snyder early in the year, originally for $17.5 million payments annually for 20 years. But Orr said that proposal was revised to a one-time, $195 million payment before the Michigan Legislature passed the package of bills in June.

That way, he testified, future politicians can’t change it.

“It evolved to a net present value funding mechanism where the state would fund a lump sum on the front end and would be factored out,” Orr said.

9:35 a.m.

Part of Orr’s strategy in forming the terms in the Plan of Adjustment is to “get the city out of the debt business,” he said.

That’s why the plan, which describes how Detroit will restructure its finances and city services – if it’s approved by bankruptcy Judge Steven Rhodes – puts in place funding for the city to operate and pay debt for 10 years without seeking additional financing.

“We’re trying to keep the city out of the capital market for a decade,” Orr said.

His statements came during his testimony related to the issue of the city-owned artwork in the Detroit Institute of Arts collection. City attorney Greg Shumaker, of the Jones Day law firm, was questioning Orr about whether he had considered pledging the museum’s assets as collateral for any loans to raise funds for the city.

Orr had not, choosing to protect the artwork.

“When you pledge any collateral as debt, there’s a risk it will be seized,” he said.

9:16 a.m.

Orr is testifying about the “Grand Bargain,” the deal that brings foundation and state money to the pension funds in exchange for not selling the collection at the Detroit Institute of Arts to raise money to pay creditors. The agreement also prevents some litigation against the city or state related to the reduction of pensions in the bankruptcy case or challenging the emergency manager law.

In valuing the Grand Bargain, Orr is using the $816 million figure, which is what it’s worth over 20 years. The present day amount is $661 million.

The DIA, the board of the foundation and the Michigan Attorney General disputed creditors’ claims that art could and should be sold to raise money for financial creditors. “There were other parties in the museum community who had voiced their opposition to any plans to sell the art,” Orr said.

DIA officials made clear to Orr that they would legally defend every single piece of art in the museum from forced sale, he said, noting some “high net worth individuals” would support the effort.

“I had every reason to believe their intent was sincere and they had the means to carry it out,” Orr said. “I think it’s fair to say it would be lengthy and intense litigation.”

9:01 a.m.

Orr’s testimony resumed with a discussion of the city’s settlement with bond insurers of the Limited Tax General Obligation bonds, Ambac Assurance Co. and BlackRock to reduce the $164 million they were owed. Here’s what we reported when the deal was announced.

The settlement includes a 34 percent payout on the insurers claims, Orr said. The bond insurers, as part of the deal, agreed to support the city’s Plan of Adjustment and release their proof of claims and pending litigation.

Orr also gave a short lesson in municipal finance, explaining the difference between Unlimited and Limited Tax General Obligation bonds (UTGOs and LTGOs). The UTGOs may be backed by a higher amount of tax revenue, and municipalities are able to raise tax or millage rates to pay them. “LTGO has a limit on the amount you can raise to service the bond debt,” Orr said.

In legal filings against the city’s effort to reduce their payments, the UTGO bond insurers argued that they were entitled to special liens and equity lines, Orr testified. “The LTGOs tried to draft a little bit in their papers on the UTGO theory,” Orr said. “But it wasn’t as strong.

Following that, Orr described how the city addressed its obligation for retiree health care, the “largest unsecured portion of debt obligation the city had,” he said. “”We had no money reserved for these liabilities.”

In June  2013, the city estimated its “OPEB” liabilities — Other Post-Employment Benefits, which includes health care, vision, dental and death benefits for retirees — at between $5 billion and $5.7 billion.

“Being the single largest portion of unsecured claims, even at the lower number the retiree committee actuaries focused on, that would have been a significant liability for the city, and there was a risk it would continue to grow so it would have made trying to propose a plan at least for the initial 10 years, very troubling,” Orr said.

That estimated changed to $3.8 billion after the city and attorneys for pensioners and employees negotiated.

Orr said he couldn’t give details of all the discussions because of the continuing gag order preventing release of information from mediation in the bankruptcy case. But he said the parties shared data, reviewed interest rates and information from three different actuarial firms. The city, the Official Committee of Retirees and the pension systems each hired their own actuarial firms to vet data points including the number of retirees, actuarial projections about future costs and other financial forecasting.

“There was a number of information floating between” the three firms, Orr said. “We were going back and forth with data, based on the amount of claims, mortality rates, things like that,” Orr said.

Ultimately they settled on the city providing a $450 million note and the formation of Voluntary Employee Benefit Associations, which would handle retiree medical benefits.

“The city would be getting out of the health care business,” Orr said.