The city’s creditors who are objecting to the bankruptcy restructuring plan are now presenting witnesses, starting with Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System. Earlier today, Detroit City Council President Brenda Jones and Mayor Mike Duggan were on the stand as the city wrapped up its presentation of witnesses in the bankruptcy trial. We’ll have updates throughout the day.
The trial is adjourned until Tuesday, Oct. 14. Judge Rhodes thinks closing arguments will come the week of Oct. 20.
At the end of Thomas’s testimony, Judge Steven Rhodes asked her some questions. Here’s part of their exchange:
Judge: Why do we have an unfunded liability in the city of Detroit for its two pensions?
Thomas: I believe the biggest contributing factor was in 2008, the crisis, the tremendous losses we suffered on our investments. We have an aging workforce. We’re called a mature plan where the retirees are like twice as many as the active employees so you have less contributions coming in and more benefits coming out.
Judge: Is it fair to say that in the years of that recession, whatever they were, the actual returns were less and in some significantly less than the assumed rate of return.
Yes, that’s fair.
Judge: Is it also fair to say that it’s the city who bears the risk and the responsibility when that happens?
Thomas: That’s a fair statement.
Judge: If the assumed rate of return is lower, like 6.75 percent compared to 7.9 percent, is the city’s risk that it will incur unfunded liability lower or higher, all other things being equal.
Thomas: The city’s risk is higher.
Judge: Explain that to me I thought it was the opposite.
Thomas: If the assumed rate of return then the city’s risk of having to contribute more is higher.
Judge: Based on your experience with these two pension plans, do you feel you are qualified to judge the reasonableness of the rates of return of a pension plan.
The last time the Detroit pension boards changed the asset allocations of the roughly $6 billion they oversee was in 2013, Thomas testified.
“There will be no changes until the plan is actually confirmed. There have been some discussions with the investment consultants taking into consider the changes the POA will bring but they aren’t going to make any changes prior to that. To do it efficiently you really have to plan to transfer assets of that size,” Thomas said.
The pension boards are supporting the Plan of Adjustment because of a settlement reached with the city in April.
Individual objector Michael Karwoski is questioning Thomas. He filed this objection and 98 people filed joinders. His questions are covering pension fund governance, investment interest rate assumptions and the annuity savings fund recoupment.
The city’s pension funds since March 2013 has used a 7.9 percent interest rate in forecasting returns on investments. “It’s a rate that was set with information from our actuary, asset consultant, our attorney, restructuring counsel, trustees,” Thomas said.
The city’s Plan of Adjustment uses 6.75 percent, and attorneys for financial creditors are arguing for using a higher rate. The higher rate would mean the pension systems are better funded, based on the projections, and should translate to fewer city financial obligations and lower cuts to other creditors, their attorneys say.
The 6.75 percent figure was reached during mediation and was proposed by the city’s actuarial firm, Milliman. (The pension systems and the Official Committee of Retirees, the court-mandated group, also have actuarial firms.)
Thomas testified that Milliman has not asked her any questions about the system. She was asked about certain procedures as part of the bankruptcy process. The city set up a Pension Task Force but did not tell her about it nor ask Thomas or any staff to join the group, according to her testimony.
Thomas was asked about this interview during her time on the witness stand.
The city is done making its case, and the “objectors” have called their first witness: Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System.
After creditors and city attorneys questioned Duggan, Judge Steven Rhodes had his turn. He asked about the proposal for up to $325 million in exit financing that’s in the Plan of Adjustment and he must decide whether to approve.
Here’s a portion of their exchange:
Judge Rhodes: A substantial portion of that borrowing is for purposes of paying the obligations to creditors under the Plan, You understand that.
Duggan: I do.
Judge Rhodes: There is however a piece of that that’s not for that purpose, it’s for other purpose in relations to city operation and these restructuring initiatives. … My question is what is your judgment on the need for that financing for these purposes in this second group, the city operation purpose and the reinvestment purposes?
Duggan: Your Honor, I’m probably going to get myself in trouble with the people I have to go back to the office with. I had extensive conversations with (court expert Richard) Ravitch about this and extensive conversations with (city CFO) John Hill about this, and I believe we need to keep the exit financing to the lowest possible amount. One of the troubling things we have seen is a $50 million overrun in consultant fees. I don’t think it’s a coincidence we’re going to get up to $50 million in the exit financing and the amount we’re seeing, $50 million in consultants’ fees. I’d be very disturbed if we had to borrow $50 million in consultant fees because the consultants didn’t stay on budget. John Hill thought $275 million was reasonable.
Judge Rhodes: It was explained to me that the reason for the increase was the settlement with the limited tax general obligation bond creditors that involved a cash payment to them of approximately this amount. Do you know anything about that?
Duggan: That’s the first I’m hearing about it.
Judge Rhodes: Am I right? That’s what was explained to me?
Thomas Cullen (a Jones Day attorney working for the city): Yes, your Honor, it was explained that was part of it, the decision to retire that note.
Judge: Well, I don’t want to put you on the spot and if you’re not able to answer this question, that’s fine with me. But if that’s the purpose of this additional borrowing is to fulfill a settlement obligation, is that something you could support?
Duggan: Your Honor, you’re beyond my expertise on that. I would defer to John Hill whether that extra $50 million is needed or not. I know philosophically he believed as do I that we should keep this borrowing as low as we can.
Here are the last updates from Duggan’s testimony under questioning by city attorneys:
On the inclusion of the Financial Review Commission in the grand bargain legislation:
“There was no way the grand bargain legislation was going to pass without a financial review commission,” Duggan said.
On what he sees as the risks of the Plan of Adjustment and the restructuring initiatives:
“For the most part, I worry about things that are outside of our control,” Duggan said. Those include suburban casinos that would cause a decrease in the city’s annual $170 million it collects in taxes from the three downtown casinos and a decrease in state revenue sharing dollars. The plan projects a steady rate of that money.
“It’s going to be really hard work to make sure that happens but those are things that I signed up for and I’m going to work really hard at them every day,” Duggan said.
Here are a few more highlights of Duggan’s testimony.
On the proposal from financial creditors to sell Detroit Institute of Arts assets to raise funds:
“There’s a feeling of hope in the city. … To take the art institute out, it’s such a centerpiece of the city I think it would be a huge negative for our image. I think it would be a huge negative for people’s decisions and I think it would plunge the city into the kind of anger and turmoil that we’re trying to get away from.
On the possibility of raising taxes in the city:
“There’s no more inefficient way in the city of Detroit to collect tax revenue than in the property tax,” Duggan said.
In addition, he said, there isn’t much money to be gained as one mill of property tax raises only $7 million.
On negotiations in the bankruptcy case:
Duggan was involved in the mediations regarding the Syncora settlement and the creation of the regional water authority.
“With the exception of those, I’ve had very little involvement in the other settlements,” Duggan said.
City attorney Thomas Cullen, of the Jones Day firm, questioned Duggan during the direct examination portion of the mayor’s testimony. Cullen asked Duggan to give a summary of his opinion on the Plan of Adjustment. Here’s what Duggan said:
“I support this plan and I believe it is feasible. I can’t predict a national recession. I can’t predict state revenue sharing cuts. I can’t predict casinos being approved but those are the risks I signed up for as the mayor. But I believe in this plan there are resources to be successful if we’re aggressive, we work hard and we don’t have any serious misfortune that’s outside of our control.”
Despite the many improvements made during his tenure, city services aren’t at the optimal level, Duggan testified.
“We’re probably about 10 percent of where we need to be,” he said. “There’s a lot but we’re building gin the right order. It’s going to be a multi-year process before people get the kind of services they deserve.”
Here are a few more highlights from Duggan’s testimony:
On transit: “If Detroiters are going to have opportunity to go to work and school, we’ve got to have transit,” Duggan said. “Three quarter of the buses are approaching the age of retirement.” A federal grant, announced last month, will provide $26 million for Detroit Department of Transportation improvements. “The city is hiring more drivers and will hire more transit police officers,” he said. “We’re are going to put out a schedule that we are going to honor.”
On the roughly 275 parks the city owns: “In 2013, the city maintained 25 of them on a regular basis,” he said. Today, that number is 180. “It was good but it wasn’t enough,” he testified, so Duggan reached out to churches and businesses, and they adopted 75 parks. The groups mow the parks every 10 to 14 days and pick up trash three times a week.
He said that effort is part of a new philosophy beginning to emerge in Detroit: partnering with city government, “not expecting city government to deliver all services.”
On the 100,000 vacant lots: Some had not had grass cut since 2010, which Duggan called demoralizing. “If you’ve got a neighborhood with a few vacant lots, usually the neighborhood will pitch in and cut it,” Duggan said. But when there are several, it becomes overwhelming. Duggan said the city started mowing this year.
“We cut them all once and now we’re halfway through the second cut,” he said. “If you drive through the city today the vacant lots are in far better shape than they were a year ago. These kinds of things are significant factors in people’s decisions about whether they’re going to stay.”
Duggan testified that the negotiations for the recently ratified collective bargaining agreement with the Detroit Police Officers Association demonstrate how the Plan of Adjustment will guide the city’s operation.
He said he talked to Emergency Manager Kevyn Orr about changes he wanted to make in the police department. “He said, ‘if you can work out a deal within the dollars of the Plan of Adjustment, go ahead,’” Duggan testified.
The deal, announced last week, includes a base pay raise of 8 percent. Duggan said money was available because of reductions in sick days from 17 to 12, the elimination of the retention bonus and the replacement of uniformed officers in traffic, prisoner transport and crime statistics positions with retired officers who would not need benefits.
It was ratified 80-20, Duggan said. “The officers now know they’ve got an immediate 8 percent pay increase and we’ve got the ability to bring back retired officers to paid position ad you’re going to see us be able to effectuate the Plan of Adjustment by putting more officers back on the street,” Duggan said.
A few highlights of Duggan’s testimony so far:
“One person doesn’t do a turnaround. You need to recruit a strong and deep team in order to deliver services to the public … You’ve got to plan two or three years ahead because you never know what’ coming up in the state of Michigan economically.”
After he was Wayne County Prosecutor, Duggan became head of the Detroit Medical Center, which was in dire financial straits. “When I came in, we have 15 days cash on hand,” Duggan said. “The bankruptcy attorneys had already been hired.”
Like Detroit, the DMC had problems with service delivery and leadership turnover. “We really had to rebuild the team from scratch,” Duggan said.
Gov. Rick Snyder approached him about being the emergency manager of Detroit. “I told them I didn’t agree with the principle of an emergency manager and I wouldn’t be interested, but I started to think what’s the alternative,” he said. So in late 2011, he said to his wife, “Let’s move back to the city. Let’s see what happens.”
His tenure at the Detroit Medical Center was “the most powerful” of his life, Duggan testified. “If there’s any place in the country where we’re getting past the racial divisions, it’s in an urban emergency room,” Duggan said. “I started to think it could be possible that we could break across the barriers in other parts off the city. I really felt like if I could meet everybody in the city we could get past those racial divisions.”
Mayor Mike Duggan is on the witness stand.
Judge Steven Rhodes had his own questions for Jones.
Judge: As you know, the plan does not provide for a public sale of the art at the Detroit Institute of Arts. Do you have a position whether the art at the Detroit Institute of Arts should be sold to pay creditors of the city.
Jones: My position is per the city charter, the city should provide art and culture to the citizens of the City of Detroit and the art, protecting the art and the DIA is helping to follow the city charter of the city of Detroit.
Judge: What is your understanding of why the city charter has that provision in it?
Jones: Because the citizes of Detroit need culture and art provided to them. The citizens cry all the time about the taxes they are paying. The need something just outside of paying taxes as cultivation of the city.
After city attorney Greg Shumaker finished about 30 minutes of questioning, Jonathan Wagner cross examined Jones. He’s an attorney for the holders of the Certificates of Participation (COPs), the controversial pension funding deal. He asked about the funding level of the Police and Fire Retirement System, where Jones is a trustee. The system issued a statement in March 2013, saying the plan was 96 percent funded. Today that figure is 89 percent.
Attorney Ed McCarthy also questioned Jones. He’s an attorney for Financial Guaranty Insurance Company, which has a roughly $1.1 billion claim in the case as the insurer of the COPs. He asked about the $1.7 billion in the city’s Plan of Adjustment for city services, known as the Restructuring and Reinvestment Initiatives (RRI). “The city council and the mayor to the best of their ability will implement the allocation of the money that is in the RRI,” she said. Through his questions, McCarthy pointed out the City Council had not reviewed the value of the Detroit Institute of Arts collection, the economic value of the museum to the city, the number of annual visitors it has and other subjects before the council voted to transfer the DIA assets to a nonprofit, as part of the Grand Bargain.
After McCarthy, Debra O’Gorman questioned Jones. O’Gorman represents the Macomb County Public Works Commissioner Anthony Marrocco, who has a $26 million claim against the city related to a pending lawsuit over the Macomb Interceptor Drain Drainage District.
Here are some highlights of Jones’s testimony.
On pensions being cut as part of the bankruptcy settlement:
“When you work a job and you look forward to retiring, you look forward to the dollars that you will have to care for yourself and your family, to know that your pensions will be drastically cut and the money you expected to receive you will not be receiving, that definitely has an effect on you.”
On the Financial Review Commission:
“They will make sure the council and the mayor are doing what we should do to make sure we stay on track. … I was not at first in favor of it. There were some concerns on council of not having a role or not having a seat on the financial review commission and there were concerns about the amount of work council would be doing with them.”
On the original structure of the Financial Review Commission (which did not include a member appointed by the Detroit City Council, as it does now): “All nine council members went up to Lansing and talk to the legislators as well as to testify that we felt council should have a seat on the financial review board,” Jones said. “Having someone look at the work we do and approve it for 20 years. We felt that if we could show we could do our job,… then the oversight commission should go dormant and not come in unless we can’t do our job which we felt we could.”
On how council and the mayor will work together post-bankruptcy:
“We will continue to collaborate and talk about the things the city needs to have adequate services. I’m sure he will collaborate with my colleagues to make sure we have no deficit and to make sure the budget is met.”
On how bankruptcy will change Detroit:
“I’ve been on council for nine years. I’ve watched the city fight to see do we pay Peter or do we pay Paul. Now we’ll be able to know who we’re paying and be able to have the money to pay them and be able to give the citizen services they deserve to have as a tax-paying citizen of the city.”
Jones answered questions about whether she agreed with the bankruptcy filing. “I felt the bankruptcy could have been done by the city themselves rather than have an emergency manager there,” she said, adding she eventually changed her mind. “As we have progressed through the stage, and I have seen the progression that has taken place, I’m happy with the progression and the level of services the citizens are seeing. I think it’s helping to improve the city,” Jones said.
City services are a popular conversation topic in Jones’s life. “I cannot go into a grocery store to go shopping, I cannot shop without a resident telling me about the level of services they have in the city of Detroit,” Jones said. “They are saying that the services are not adequate.”
City attorney Greg Shumaker, of the Jones Day law firm, is questioning Jones, who is an at-large member of city council. City Council Members Saunteel Jenkins, Andre Spivey, Gabe Leland are in the audience.
Jones says others will come after committee meetings. Jones says the mayor and the council have a good relationship. Shumaker asked her about the emergency manager. “I am happy to say Kevyn Orr and I have a good relationship, now,” Jones said, which was followed by courtroom laughter.
Shumaker asked her if there was a time it was “less than good.” “I would not say it was less than good I would just say that we did not have a communication,” Jones said. She identified blight and public safety as the biggest problems facing Detroit, and said the city’s service delivery is “improving.”