Day 23: Detroit’s Bankruptcy Trial

Day 23: Detroit’s Bankruptcy Trial

Judge Steven Rhodes is questioning “his” expert witness: Martha Kopacz, a Boston-based restructuring consultant. He appointed her earlier this year, and she has been reviewing the city’s legal filings, budget reports and financial projections as well as interviewing city officials to determine the feasibility of the city’s restructuring plan.

11:08 a.m.

In the last of her testimony, Kopacz called the exit financing a ship that has sailed and said adjusting it could have a negative effect in financial markets. She praised the five-year collective bargaining agreements reached. “It gets the city beyond this administration,” she said. The stability provided by the contracts help provide more accurate financial projections, which increases the plan’s feasibility, Kopacz testified.

The judge asked Kopacz what advice she would give to the Financial Review Commission, established by the state legislation to oversee the city’s finances. She said:

“I’m not sure I’d give them any advice. I think the formation of that commission is really the most important thing that the state is going to undertake and that it will hopefully support as everyone intends the effective implementation of the plan. Because the state has designated participants and the city has designated participants, whom I believe would look out of the interests of the state and look out for interests of the city, I think it would be advisable if the commission included some more independent, maybe more out of geography sort of individuals that have the requisite skills. … I would hope in the appointed people that they get some diversity of geography and mindset and skills.

10:58 a.m.

Settlements with all creditors who are represented by attorneys and had filed plan objections bodes well for plan feasibility, Kopacz testified.

“It improves the feasibility,” she said. Her July report identified “unresolved issues” related to outstanding creditors. “In the report I filed yesterday, I’ve identified many of those unresolved issues that are now solved. That’s favorable to feasibility,” she said. “But the cost of those settlements has pushed the city to the skinny end of feasibility.”

10:52 a.m.

Judge Rhodes asked Kopacz her opinion on how the state legislation impacts feasibility of the Plan of Adjustment. She said:

“:It favorably impacts my assessment of feasibility because the existence of the financial review commission, the oversight commission I think is a very positive, qualitative factor in ensuring that the city conducts itself in such a way that ensures or helps to ensure the commitments of the plan are going to be met.”

Rhodes asked Kopacz her opinion about the city’s leadership as related to adoption of the Plan of Adjustment. She said:

“I have a great deal of faith in Mayor Duggan and the city council, that they are going to work diligently to implement this plan.”

Rhodes asked Kopacz to give her assessment of city’s workforce and its ability implement the Plan of Adjustment. She said:

“I’ve not dealt with a significant number of the city employees. I have interacted with a lot of department heads, a lot of finance people in departments and probably middle management and up. I think there is a genuine desire to right the ship, to help the city prospect. I think that again that group needs a more detailed plans, more understanding of the changes that are envisioned but I think there is a significant level of enthusiasm at least amongst the mayor, his direct reports and the senior leadership of the city to accomplish in large measure what’s been laid out here.”

She also answered the judge’s question about what system workforce issues exist relative to the implementation of the Plan of Adjustment by saying:

“I think there are system workforce issues around training and having the right people in the right spots. The city is way underinvested in human capital, and I think there will be challenges because of the collective bargaining agreements and the civil service rules in terms of what do you do with an employee who doesn’t have the skills that the city needs going forward so that is something that organizations deal with all the time and is going to have to be effectively managed, but I think for the most part people want to do a good job. I think a lot of people will be excited to learn. They want information systems. They don’t want to wait until 5 o’clock at night until everybody’s off the system to run their report because their reports are too big and they crash the system. Employees don’t want ot live in that kind of environment.”

10:19 a.m.

Judge Rhodes is asking Kopacz about risks in the Plan of Adjustment. Here are a few topics he asked about and what she said.

*If the 6.75 percent interest rate projected for pension fund investments is reasonable. “I would make it 5 percent if I ruled the world,” she said. In a nutshell: the more conservative the better.

*Whether the change in pension benefits and plans affects the bottom line. “The city needs to attract new employees. Whether or not that plan will be attractive to people who want to be employed in the city, long or short term, is left to be seen. How the hybrid plan affects the existing workers in terms of morale and motivation is yet to be seen. It doesn’t have an economic impact, per se, it has an impact on how employees view their role with the city.”

*The level of funding set aside in the city budget for contingencies. “I’m not comfortable with the level of contingency. I would like more than the 1 percent that is factored into these projections. I understand that it may not be possible but it’s a continuing concern. It was a day one concern. But at the end of the day, it doesn’t push me to a point where I think the plan’s not feasible because of it.” Kopacz said she would prefer contingency funding better targeted to the more potentially variable expenses and revenues. “It would be more functional than formulaic and it would be a whole number that would be determined based on some good analysis and conversation,” Kopacz said.

10:02 a.m.

Judge Rhodes asked Kopacz about financial risks that remain for the city. Here’s what she said:

“The good news is that some of the benefits as a result of the restructuring have been fixed at reasonable levels going forward i.e. pension and that sort of thing. Obviously the city still has to susceptibility to changes in health care, which everybody does, that’s just challenging for all employers. Currently the city doesn’t’ have as many employees as it needs, and so there’s a risk that the existing employees are working more overtime. So you probably have an offset there between a lower headcount with some more overtime. I don’t think there is a large risk that the city will get out ahead of its headcount projections so I’m not particularly worried that the city will hire too many people too fast. Against that a two-edge sword in terms of getting the change implemented that needs to happen …

“The other part is really on the procurement side with expense. The other large components of city expenses are purchased services of all kinds as well as things that it buys for itself, like some material and supplies and that sort of thing. Procurement is an area where there was a lot of mischief in the past. I don’t want to get anybody mad at me, but there was a lot of mischief in procurement in the past and the city hasn’t fundamentally changed much of its procurement process although … I do think it’s going to get better. I think the information system, all of those changes, are going to help a lot but the … risk that the whole purchasing side of city expenditures could be higher than expected.”

9:52 a.m.

Kopacz found the city’s revenue projections, used to create the Plan of Adjustment, reasonable. These include:

*Income tax revenues, which are project to grow at about 2 percent annually. Kopacz said those are reasonable. “I actually think they could be conservative, even with the reinvestment initiatives,” Kopacz said. “I think the risk is more external to the city in terms of macro risk, god forbid there’s another great recession or some national disaster that affects the city.”

*State revenue sharing, which comes from the constitution – which is recalculated every 10 years based on population – and statute – which sets standards the city must meet to receive the money. “The city has always received 100 eprcent of what they’re eligible for,” Kopacz said. But projections are thatstate revenue sharing payment will “stay flat,” she said. Rhodes asked her if there were risks in those assumptions.

“I suppose there’s a risk that Detroit would miss the incentive portion of revenue sharing, but I find that difficult to fathom given the current capabilities of the mayor and the financial officer,” Kopacz answered.

*The casino tax revenues, which are assumed to decrease in the near term. “The assumption is that the wagering tax will drop a little bit in the next couple years. It will flatten out and then grow very slowly at a percent a year,” Kopacz said. “I think the projection that’s there now is reasonable.

*An overall savings of $483 million because of better operations. Part of that would come from improvements to revenue collection. “The city does a very poor job of collecting money that it’s owed,” Better technology, Kopacz said, would improve those efforts.

9:41 a.m.

Kopacz testified the city should publicly report how it spends the $1.7 billion, currently proposed in the Plan of Adjustment to improve city services.

“There has to be a scorecard of metrics relative to each of the restructuring initiatives as to how effective those dollars are being spent,” she said. “I think that will give good information, it will give good transparency not only for the review commission but for the citizens to understand how the city is doing in terms of making these reinvestments successful.”

Such reporting, she said, would have two purposes: internal management and external public accountability.

Kopacz also said the city should do “regular reporting” of such a scorecard. “The city should be reporting its progress more than through the (financial statement) that it does once a year. There needs to be a good dialogue between the city, the review commission, the city council in a way of reporting things out that is factual that doesn’t have public relations spin to it. It’s just data.”

9:21 a.m.

Kopacz testified that the Plan of Adjustment, created largely by the emergency manager, is not optimally integrated into the city budget or departmental operations, overseen by the City Council and the Mayor.

“It’s not in the budget and there’s not a robust implementation plan behind it,” she said.

Rhodes asked her if she had spoken to city officials about that.

“I have, and they agree with me,” she said.

Rhodes asked if she had “seen any evidence of movement toward resolving this issue of getting these changes into the budget?”

“Yes, on a department-by-department basis, yes, they are working on that,” she said.

9:16 a.m.

Rhodes asked Kopacz about her opinion of how the 15-month-old bankruptcy process has gone. Here’s what she said:

“The speed of this proceeding has been a two-edged sword. The good side of that is that in little more than a year, the city will have gone through a massive restructuring process and will have significantly de-levered its balance sheet. Going from in excess of $10 billion to less than $4 billion is a huge de-levering of the city and that’s a really good thing. But because the focus has been on the bankruptcy and the speed in getting that done, there has not been until recently as much energy put into restructuring the operations of the city. Functionally, the city operationally was broke, and that’s evident in that it’s service delivery insolvent. I believe the emergency manager had to pick one of two options. The focus was on delivering not fixing the operations. That as one way the speed cut against necessary, long-term things which will now have to be accomplished outside of the bankruptcy which could be more difficult to achieve than inside the bankruptcy with the power of the Emergency Manager.

“The other part of that is the speed and the bilateral negotiations with the mediators. The city and the counterparties, in having all of those bilateral  and none of the multiparty sorts of things, really created a win-lose situation where the parties were always coming back to the city for more and more … where as in a longer process, if there had been more time for the counterparties and stakeholders to really get and understanding of the city’s needs to fund investment going forward and what its real cash flows were, I think we would have been able to reach settlements where maybe we weren’t as close on that continuum of feasibility as we are today.”

9:03 a.m.

Kopacz says the city’s Plan of Adjustment is “feasible” with “reasonable” financial projections. But she has not yet been able to fully review the latest draft Plan, filed yesterday with updated projections after recent settlements and additional revenue sources including parking revenue. Kopacz said she reviewed the 10- and 40-year projections, provided by city consultants but had not yet analyzed the restructuring and reinvestment initiatives (which total about $1.7 billion) and the triennial budget, provided by city staff.

Her overall analysis of the Plan of Adjustment included “quantitative and qualitative” work, that evaluated whether the city had the “skill and will” to implement the plan.

Rhodes questioned whether the city’s plan to issue $632 million in B notes, payable over 30 years with interest-only payments for the first decade, was reasonable. Kopacz said she believed the city could repay those.