While the true cost of Detroit’s bankruptcy won’t be known likely for months, one local media outlet has jumpstarted its investigation into at least a preliminary estimate based on what’s been submitted to the fee examiner in the case. (The fee examiner, who is appointed by the court, reviews billings for professional fees and submits to the judge a critique of the reasonableness of them.)
WXYZ-Channel 7′s Jim Kiertzner, an investigative reporter, and Adam Brewster, a producer, have been reviewing thousands of pages of attorneys fees and expenses charged to the city in the case.
Here’s Kiertzner’s first report, which aired Nov. 14. The second, found here, aired a few days later. Their findings are, well, you decide the adjective. The station is calling the ongoing series of reports the “Bankruptcy Bonanza.”
One attorney charged $450 to WALK from the Westin Book Cadillac to Detroit’s federal courthouse. A block away.
Jones Day attorneys, working at the firm where Detroit Emergency Manager Kevyn Orr has been a partner, billed for chauffered rides from Cleveland.
Kiertzner got a microphone in front of Gov. Rick Snyder to ask if the state would chip in for the expenses, which could approach $200 million when the trial is counted. Here’s that report.
For his part, Mayor Mike Duggan tells the Channel 7 reporter that the city will “fight hard” against the fees, calling these early billings the “tip of the iceberg.”
Does that make the city’s taxpayers, who are ultimately footing the bill, the proverbial Titanic? We’ll ask Kiertzner, he’ll be on WDET’s Detroit Today program Wednesday.
Broadcasting from the Westin Book Cadillac Hotel, MiWeek host Christy McDonald leads discussions with executives attending the Business Leaders for Michigan CEO Summit. They talk about Michigan’s future in a global marketplace and give an update on Detroit’s exit from bankruptcy.
Detroit’s on its way out of bankruptcy. There are the obvious changes – new streetlights and increased public safety – and things that still have to be addressed, such as the future of pensioners who will have to make do with less. But what about the things that were lingering before bankruptcy? Bridge Magazine contributor Aaron Foley examines some of those…and how he’d like them addressed.
In approving Detroit’s Plan of Adjustment, bankruptcy judge Steven Rhodes is allowing a group of lawsuits to go forward against the city. WDET/NextChapterDetroit.com’s Sandra Svoboda spoke with Attorney Bill Goodman about his clients, their civil rights claims against the city and what the bankruptcy judge decided about their cases.
Goodman: What Judge Rhodes did in his opinion was to say that those people who have sued the city of Detroit and Detroit police officers and other Detroit public officials for violations of their constitutional rights may not go forward in those actions against the city of Detroit itself. The city of Detroit itself can only be sued under this federal civil rights statute for its policies, its practices, its customs. Those cases cannot go forward. But the cases against the individual officers can go forward, the bankruptcy proceeding does not impede those cases from going forward. People can rectify to some extent the wrongs that were done to them, that they can get justice in that way, and the city has to indemnify those police officers. That is if one of my clients sues a Detroit police officer and gets a million-dollar verdict, the city itself has to pay for that police officer’s verdict so that the police officer himself or herself cannot be personally attacked for that.
Svoboda: And when you say they have civil rights complaints, civil rights claims, tell me a little bit about what some of these cases involve.
Goodman: Really, our flagship example is Walter Swift, a man who spend 26 years in prison for a crime that he did not commit and that everyone knows he didn’t commit and was exonerated and released. Still, he has been waiting since this bankruptcy, has been waiting before, cannot go forward with his case, cannot get justice, is personally impoverished and has had his life taken from him. He’s one example. There are others. There are people who have been falsely arrested at raids conducted by the Detroit police department.
Svoboda: So most of what he hear from Judge Rhodes and what we report about the bankruptcy have to do with these complex financial settlements or bankruptcy law itself. Where do these individuals fall within this case?
Goodman: They’re what’s called unliquidated creditors. They’re like anybody whose garbage can was destroyed by a garbage truck and said, you know, “Hey, you guys have to pay for this” Or someone who was in a bus accident. That’s who they are. The difference that they have and that we have asserted is these people are people whose constitutional rights have been violated. And the constitution of the United States in a democracy should be supreme. It should not fall under the wheels of a bankruptcy proceeding.
Svoboda: But Judge Rhodes disagreed with you in his ruling on that piece of it.
Goodman: And I disagree with Judge Rhodes, right back at him.
Svoboda: But your cases now can go forward because in confirming the Plan of Adjustment, as you described at the beginning, discussed how the individual cases could proceed. What’s next for you?
Goodman: Next for us is that our cases start proceeding. In Walter Swift’s case we start taking depositions. We go forward. We go to trial if we need to, and Walter gets to present his case to a jury and have a jury decide whether he’s right or not. That’s how we go, and our case is based upon what he said, and I’m looking for his written opinion. I take it that the stay of proceedings in those cases is going to be lifted as to the individual cops.
Svoboda: What’s the legal history for these claims and how does it play in to the greater legal sense going forward?
Goodman: The Civil Rights Act under which these people have brought their claims is called Section 1983 of the federal code 42 USC. It really is known as the Civil Rights Act of 1871, and it was passed, it was really originally passed in 1866 just at the time the 14th Amendment to the U.S. Constitution was passed. It was passed during a period of huge turmoil in the United States, of the Ku Klux Klan riding high, a birth of a nation racism rampant throughout much of the nation, and it was meant to correct that and hold public officials responsible for what they did. That need, that impulse is still of critical importance not just in 1871, not just in 1961 when that law was made to be really effective by the United States Supreme Court. But today, we need to have a rule of law, and in the United States, in a democracy which we claim to be, that means under the United States Constitution.
Here’s some of what was said during the news conference, following Judge Steven Rhodes’s approval of the city’s Plan of Adjustment.
Following the formal statements, reporters asked a few questions. Here are some of what was said during responses.
Snyder: “We have a common customer. Every citizen of the city of Detroit is also a citizen of Michigan.”
Rosen: “I think the legacy of this bankruptcy will be teamwork. … It’s amazing what you can do when, first of all, you don’t care who gets the credit and, second of all, you’re willing to open your minds and your hearts to people who may have different views from you.”
Rosen: I’m sure any reviewing court will look at what we’ve done here and what we’ve accomplished as a whole. …
Rosen: “Three different branches of govern working together. … that’s unique.”
Snyder: “Part of the grand bargain was keeping people out of that social safety net that we provide at that level.
Orr: “The governor from the outset was very concerned from the standpoint of fairness and from the standpoint of compassion. … that process will be rolled out. We’ll give you more information but no one should have a fear that because o the adjustments being made to pensions that they’ll fall below the poverty level.”
Orr on how the Detroit bankruptcy affects other municipal bankruptcies: “I caution everyone as taking Detroit as a template or a precedent for anywhere else.” Each municipal bankruptcy will have different factors including debt load, borrowing ability, worker-to-retiree ratios and legacy debt obligations. “Everyone’s different. People have to be very careful.”
Mayor Mike Duggan also had a positive statement, thanking many. Here are excerpts of what he said:
“We had a 40-year dispute on the water system and it’s almost like a footnote that it was solved in the course of this process. What all the judges and all the mediators did in this process was remarkable.
On speaking with Kevyn Orr’s wife:
“The one thing we both agree on is we are very happy that he’s going back home.”
On his relationship and opinion of Kevyn Orr:
“Kevyn and I did not start out on the best of terms. … but through the entire thing he was 100 percent open and honest. … I don’ know how anyone could do anything but acknowledge he did a fine job. The entire city owes you a debt of gratitude. “
On Gov. Snyder:
“This is the second biggest day of the week for the governor.” He has invited the governor and his staff to visit the city next month and then have dinner at the Manoogian mansion, the mayor’s official residence.
Council President Brenda Jones spoke next:
“Judge Rhodes’s decision has given new life to the city we all love,” she said. “We must control costs and finances. We must find more efficient methods of delivering services. More importantly we must find ways of employing the long-suffering people of Detroit … A plan for our people is critical … while we celebrate our efforts on bankruptcy, let’s focus our efforts on getting citizens back to work making our streets safe and … making a safe and growing city … I’m excited on this day and I look forward to wroking with stakeholders to lead our city and build a city we can all be proud of. … Now I say, Detroit, we will rise.
Emergency Manager Kevyn Orr said he could “take all day” thanking all the people who deserved to be thanks. “All I would like to say is I think what you saw today is the best of us. The best of Detroiters, the best of Michiganders, the best of Americans.”
He described today as this:
“The rule of law, comedy, civility and unity prevailed, sometimes not too easily. But eventually came through.”
He acknowledged that the media reported accurately and explained the bankruptcy to citizens “in a way that I could not.”
He choked up in thanking his wife and children. “That kind of keeping me grounded is something you can’t buy. She is the love of my life.”
Now up, Gov. Rick Snyder. Here’s some of what he said.
“The city has a bright future and it was because of the hard work of so many people.”
“For too long it had been Detroit versus Michigan in too many ways. … There has been a massive change in our state… It’s not Detroit, Michigan. That needs to last. … The only reason the settlements took place and the plan of approval took place is because so many people rallied.”
“It happened because of retirees. That’s something we should never forget. I appreciate the sacrifices that are being made.”
“Hopefully we continue to see a strong comeback in the city. We need to recognize that we all came together.”
“We do need to redouble our efforts on the neighborhoods.”
“I look forward to a traditional governance structure with the mayor and city council playing a leading role and having a partner in state govenrment.”
Rosen is thanking the retirees and their representatives.
“As Judge Rhodes indicated in his opinion, in a sense this bankruptcy was focused on them to a large degree and the $3.5 billion in underfunding of their pensions,” Rosen said. “They were wonderful negotiating partners. Tough when they needed to be. Tough, open-minded and open-hearted when they needed to be.”
He’s also thanking the mediation team.
Chief U.S. District Judge is leading off the news conference. He thanked Mayor Mike Duggan.
“Once the mayor took office in January he was a full partner in mediations that led to the settlements that you heard in Judge Rhodes’s opinion. I’m going to editorialize a little here but Detroit has a great mayor,” Rosen said. “Knowing that Mike is the mayor makes me even more confident in the future of Detroit.”
Then he thanked Emergency Manager Kevyn Orr, describing his position as “difficult.”
“Kevyn and his team performed remarkably and they are to a great extent responsible for bringing us where we are today,” Rosen said. “And I include within his team the Jones Day law firm.”
He went on to praise the foundations who are contributing $366 million to Detroit’s pensions.
When I first talked about the grand bargain, people looked at me like I was crazy,” Rosen said. “This would not have been possible without the foundation community.”
The largest grant is $125 million from the Ford Foundation. The Kresge Foundation is in for $100 million.
First up is U.S. Chief District Judge Gerald Rosen.
“Although we have come to the end of a chapter in Detroit’s storied history, Chapter 9, today isn’t the end but it may be the end of the beginning.”
He says his best decision in the case was recommending that Judge Steven Rhodes be appointed to oversee the case.
“What Judge Rhodes displayed today in rendering the opinion he rendered not only justified the confidence that we all on our court had in him but that he exceeded even all of the high expectations that we had and more than justified the confidence that we had. He presided over this case with fairness, integrity and honor and he brought honor to the proceedings and a firm guiding hand to this case. It simply could not have been handled the way it was handled without Steve Rhodes at the helm.”
Rosen also thanked Gov. Rick Snyder, who is standing next him on the podium, and the legislative leadership in Lansing. “Without these legislative leaders we wouldn’t be here today,” Rosen said.
Here’s what Judge Steven Rhodes read from the bench today in approving Detroit’s Plan of Adjustment and exit bankruptcy.
It’s today. After a five-week trial — spread out over two months — Judge Steven Rhodes is set to confirm or reject the city’s Plan of Adjustment. He’ll issue his ruling from the bench at 1 p.m. We’ll be live blogging from the courthouse here.
The judge’s full ruling is here.
Judge Rhodes thanked attorneys, mediators and his staff for their work in the case. Then he made a direct statement aimed at Detroit residents.
“Your enduring and collection memory of what happened here, and your anger about it will be exactly what will prevent this from ever happening again,” he said. “I ask you, for the good of the city’s fresh start, to move past your anger. Move past it but join in the work that is necessary to fix this great city. Help your leaders do that. This is your great city.”
In the final part of his ruling, Rhodes made three appeals. His first was to labor, urging union leaders to consider pension funding and long-term concerns of retirees during collective bargaining. They “should take a much broader and longer view,” he said.
His second appeal was to the state of Michigan, and he cited the state’s Revised Municipal Finance Act that states the Michigan Treasurer should protect the credit of the state and municipalities. But he said the constitutional provision protecting pensions should not be overlooked.
“It requires the state to take full responsibility to vigorously supervise and regulate its municipalities to ensure adequate pension funding,” Rhodes said.
Rhodes notes that the Michigan constitution “does not single out municipal bonds,” and he said that “bond obligations can no longer be the first municipal budget obligation in this state.
“Moreover, the constitutional protections for municipal pensions can only be realized through honest, complete, realistic accounting and actuarial disclosures,” he said.
His third appeal was directly to the governor about the composition of the financial review commission. “The law by itself is not enough. The effectiveness in ensuring the long-term feasibility of the plan and the city’s fiscal health will (rely on) its members have the skill, standing, expertise, experience, independent, and commitment that are the most outstanding that can be found and without question,” Rhodes said.
He said the mayor and city council president’s presence on the commission could “skew voting,” and “equally importantly, it also risks undermining the public’s perception of the legitimacy and independence of the commission.”
Today Rhodes reviewed some of her testimony and reports, including her conclusion that the plan was on the edge of feasibility because of the small margins of debt-revenue it provides for. He noted she found the plan feasible and reasonable.
As far as the constitutional claims, Rhodes said the U.S. Constitution does not protect the creditors with constitutional, civil rights claims in bankruptcy. But their lawsuits (and potential damages being awarded) against individual city employees can continue. “A third-party release would deny injured parties their just relief,” Rhodes said.
A few views on Twitter:
— MuniCredit (@MuniCredit) November 7, 2014
— Detroit WaterBrigade (@DETWaterBrigade) November 7, 2014
Rhodes — “let’s stand for one minute, and relax”
— ChristineFerretti_DN (@cferretti_dn) November 7, 2014
Judge Rhodes is discussing why some classes received better treatment (higher recovery rates) than others, getting at the issue of “unfair discrimination.” He said the city’s decision to preserve pensions (with smaller reductions than financial creditors took) is “necessary to its mission” as a municipality.
He is noting that some of the provisions in the Plan of Adjustment that “appeal to the court’s conscience.”
Rhodes says within the next few days, he will establish a process for the review of fees in the case. He also criticized the Detroit Fire Fighters Association public statements criticizing his ruling that creditors could not object to fees in the case.
Judge Rhodes predicts the city will pay more than $100 million in “professional fees” related to the case. That’s about 10 percent of the city’s annual operating budget. He also calls them “reasonable” in the case.
Throughout his reading of his decision approving the Plan of Adjustment, Judge Rhodes has praised the Detroit Institute of Arts and recognized its importance to the city, region and state. He called the museum “an invaluable beacon” for education, worldwide attraction and civic pride.
“Every great city in the world actively pursues these values. These are the values Detroit must pursue to uplift, inspire and enrich its residents and its visitors,” Rhodes said. “To sell the DIA art would forfeit the city’s future. The city made the right decision.”
Judge Rhodes addressed the assertion raised by some creditors that the city should raise taxes to increase its revenues.
“Raising taxes is not a viable option for the city,” Rhodes says of the potential for Detroit to raise money for creditors through tax hikes on property. The city is at tax saturation, and raising taxes would bring in little extra revenue while driving more people out.
“People will long remember that when Detroit arrived at this troubling hour, its residents and leaders – with supporters statewide – started to pull together as one. Our state has rallied around its largest and iconic city. It is no longer Detroit vs. Michigan, but the embracing of Detroit, Michigan.
“This day marks the end of the nation’s largest municipal bankruptcy, resolved quickly and successfully as a result of cooperation, compromise and a shared vision from many parties. And it offers hope to hundreds of thousands of residents who call Detroit home.
“This difficult process inspired an unprecedented ‘Grand Bargain,’ where our philanthropic and business communities joined with lawmakers from both parties to lessen the impact on pensions and extend vital services. And we deeply appreciate the sacrifices from retirees who have agreed to take less to help their fellow Detroiters and Michiganders.
“Much work remains, but we are resolved to continue moving forward collaboratively. Our goal is to restore the vitality of this great city from downtown through the neighborhoods, with the quality of life that Detroit’s families deserve. We won’t settle for anything less.
“Detroit’s journey is far from over. But there is no mistaking that Michigan’s largest city is stronger. Its brightest days are to come.”
Emergency Manager Kevyn Orr’s spokesman, Bill Nowling, released this statement from Orr.
“With Judge Rhodes’s historic decision, Detroit moves further along the path toward financial stability and success as a viable and attractive place to live, work and invest,” said Mr. Orr. “My team and I are pleased that Judge Rhodes agrees that the Plan is the best way for the City to
resolve its financial difficulties and remain on solid financial footing.
“This decision would not have been possible without the hard work, compromise and sacrifice of so many people and organizations that put aside their considerable differences and came together for the benefit of Detroit’s future. Throughout this entire process, we have benefited from the leadership of many people – namely, Governor Rick Snyder, Mayor Mike Duggan, Judge Rhodes, U.S. Chief Judge Gerald Rosen and his team of federal mediators, the Detroit City Council, the Michigan Legislature, the foundation community, the Detroit Institute of Arts and its supporting organizations and the leadership teams and advisors of all of the City’s counterparties. “
“Importantly, we also have been inspired by the tireless resolve and deep commitment to Detroit of the City’s workers, retirees and citizens. Their strength of character gives me great confidence in Detroit’s future now that it will have the financial resources and discipline it needs to fulfill its vast potential.”
Judge Rhodes has been talking for about 40 minutes, reviewing he settlements and explaining why he approves them. (Details below.) Now he’s going into whether the plan is proposed in good faith, is in the best interest of creditors and the reasonableness of attorney fees.
Then he’ll cover whether the plan unfairly discriminates and is fair and equitable, specifically because two classes of creditors voted against the plan.
He’l follow that with a discussion of the constitutional claims in the case end with feasibility requirement.
The judge reviewed why he approves of the settlement with holders of the $388 million in unlimited tax general obligation bonds, which are backed by the city’s property tax revenues. The settlement calls for a 74 percent payment to holders, the highest in the case. Rhodes likes that the agreement prevents lengthy, costly litigation.
“The city’s success on the merit of litigation was a coin toss,” Rhodes said. The scenario of failure in a lawsuit, he described as “dire.”
Regarding the $164 million in outstanding limited tax general obligation bonds, Rhodes said the 34 percent recovery for creditors is reasonable.
The judge is discussing why he is approving the Detroit Institute of Arts-related provisions, which include the museum pledging $100 million toward pension funding and the museum’s collection not being sold to pay creditors.
“The court was particularly impressed with the testimony of Annmarie Erickson,” he said. She’s the chief operating officer at the museum. Here’s some of her testimony.
He noted no creditors asked for the artwork as collateral when they loaned money to the city. (Several creditors asked for the art to be sold to pay them during the bankruptcy case.)
“The court concludes that the DIA settlement was a most reasonable and favorable settlement for the city and its creditors. The court readily approves it,” Rhodes said.
Rhodes described why the Annuity Savings Fund recoupment plan is approved. Now he’s on to the state contribution agreement, which brings in $195 million of state money to the city’s two pension funds as part of the “grand bargain.” He said part of his approval is a consideration of what would happen if the state’s responsibility was litigated. (The settlement agreement contains a provision that pensioners will not file suit about the issue.)
“If the state loses it would be responsible for the Detroit pension underfunding of $3 billion,” Rhodes said. He added then the state would be responsible for all municipal pension underfunding under such a scenario, which would be “disastrous.”
The Detroit Regional Chamber of Commerce is first in with a statement about the approval. Find it here.
From the judge on the pension cuts in the plan:
“The pension reductions are minor compared to any reasonable, foreseeable outcome without the settlement and the grand bargain. At the same time, the court must acknowledge these reductions will cause real hardship and in some cases they are severe.”
On the widespread influence of the bankruptcy:
“This bankruptcy is about the shared sacrifice that will take place because the city is insolvent. … All of the city’s impaired creditors are making shared sacrifice.”
Rhodes last year ruled pensions could be impaired in the bankruptcy, despite the Michigan’s constitution’s guarantee.
“The court stands by that decision,” Rhodes said today. “Now at the confirmation stage the court must determine if the plan’s treatment of the pension claims meets the legal requirements for plan confirmation and approval.”
He recognized individual pensioners’ objections to the plan and the cuts.
“They credibly state they worked hard of the city, they did nothing wrong and these impairments will cause them serious hardship,” Rhodes said.
Rhodes says the grand bargain is the centerpiece of the Plan of Adjustment. “It is a collection of settlements among a number of parties with an interest in the city’s two pension plans and protecting the city’s art.” He listed the numerous employee, retiree, pensioners, foundations and governmental entities involved.
He’s not recounting some of the settlements contained in the plan, starting with the pensions.
Rhodes last year ruled pensions could be impaired in the bankruptcy, despite the Michigan’s constitution’s guarantee of them.
“The court stands by that decision,” Rhodes said today. “Now at the confirmation stage the court must determine if the plan’s treatment of the pension claims meets the legal requirements for plan confirmation and approval.”
He recognized individual pensioners’ objections to the plan and the cuts.
“They credibly state they worked hard of the city, they did nothing wrong and say these impairments will cause them serious hardship,” Rhodes said.
Judge Rhodes says he approves the plan, including the exit financing.
He’s now going to discuss “major issues related to confirmation.” These includes good faith, best interest of creditors, professional fees, unfair discrimination, fair and equitable treatment and constitutional claims against the city.
“Please settle in. This will take some time.”
Court is in session. Judge Rhodes is on the bench, reading in his ruling. He’ll file a written copy of it later. For now, we’ll transcribe what he’s saying as quickly and completely as we can.
Some eight rows of wooden benches in the courtroom are filled with attorneys who made arguments in the case. Some, like Alfredo Perez, who represents bond insurer Financial Guaranty Insurance Co., started out objecting to the Plan of Adjustment but through mediation reached a settlement and now supports the plan.
Also in the crowd, Mayor Mike Duggan, City Council President Brenda Jones and city general counsel Butch Hollowell. They’re in the front row. Eugene Dryker, who served as a mediator is sitting in the jury box.
Also House Speaker Jase Bolger and Rep. Thomas Stallworth.
A guide to the attorneys in the case, including a map of where they’re from, can be found here.
Meanwhile, here’s a round up of some of today’s coverage in advance of the ruling:
From the Detroit Free Press: Historic Ruling: Judge to decide Detroit bankruptcy today
From WXYZ-Channel 7: Judge to announce decision in Detroit’s bankruptcy case
From WDIV-Channel 4: Judge set to make decision in Detroit’s bankruptcy
From National Public Radio: Judge to rule Friday on Detroit’s bankruptcy exit
Judge Steven Rhodes is on the bench, and closing arguments have begun. Here’s the lineup attorneys predicted last week.
This morning, city attorney Bruce Bennett has been outlining why the latest Plan of Adjustment should be confirmed, focusing so far on the settlements and moves that reduce city expenditures. This afternoon, additional attorneys supported the plan while two individual objectors spoke against it.
Detroit’s bankruptcy trial is done. Judge Rhodes will give his opinion at 2 p.m., Friday, Nov. 7.
Assuming he confirms it, he said he will schedule a hearing to discuss the form of the confirmation order and implementation issues.
Individual objector Michael Karwoski also objected to the city’s plan, arguing to the judge he should reject it and require the city to file another plan.
Karwoski filed this objection and 98 people filed joinders. During the trial, Karwoski questioned 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. Karwoski’s questions for her covered topics of pension fund governance, investment interest rate assumptions and the annuity savings fund recoupment.
He disputes the city’s contention that some retirees received “excess interest” on their annuity savings fund accounts, calling the city’s plan to reclaim some of the money an “illegal and unjust” measure.
After attorneys supporting the city’s plan spoke, individual objector John Quinn, an attorney, argued against adopting it. He objects specifically to pension cuts and the “clawback” of some annuity savings fund monies from general service retirees.
Here’s the background: the annuity savings fund was a program that allowed non-uniform city employees (everyone but police and fire) to invest 3, 5 or 7 percent of their after-tax income in a fund co-mingled with the general pension funds. The annuities had a guaranteed rate of interest regardless of how the fund actually performed.
As part of the bankruptcy negotiations between the city and creditors, several employee and retiree groups agreed to allow a partial recoupment of “excessive” interest payments on the annuity savings fund. The provision was in the plan that the pensioners approved in their vote on the Plan of Adjustment. The recouped funds would be put back into the pension fund to make up what the city calls “excess interest payments” made to pensioners who have collected their annuity savings funds.
Here is the objection Quinn filed in the case.
Barbara Patek, representing the Detroit Police Officers Association, spoke in support of the plan. She said police officers were uniquely positioned to observe the bankruptcy’s real effects in the city.
“We didn’t need a bus tour or a complicated set of spreadsheets to understand the insolvency. Our members lived it every day in their work,” Patek said.
Robert Gordon, of Clark Hill law firm, represents the pension systems. He also spoke in support of the Plan of Adjustment and its settlements for pensioners.
“These settlements vary in their treatments and their projected recovery reflecting the varying rights of creditors groups,” Gordon said. “Somewhat miraculously a consensual plan is now before the court. … All of Michigan should be proud.”
He was followed by Ryan Plecha, who represents the Detroit Retired City Employees Association and the Detroit Retired Police and Fire Fighter Association. He credited the mediation process as the “only way” settlements were reached.
“I must also note the courage and the dedication of the DRPFFA … along with the same efforts of the DRCEA … in making the difficult choice to reach an agreement withe the city,” Plecha said.
Representing the Official Committee of Retirees, Claude Montgomery urged Judge Rhodes to adopt the plan. “The official request comes only from the city but we would ask you to approve the global settlement,” Montgomery said.
Here are highlights of what else he said:
On the varying impacts of the cuts of cost-of-living allowances (COLA) for retirees, depending on their age:
“If you don’t have very long to live, COLA doesn’t mean very much to you. If you have a long time to live, COLA means a lot to you.”
On the 6.75 percent rate presumed for pension investments:
“It’s a negotiated number. A higher number means fewer benefits cuts but greater city susceptibility to financial risks.”
Representing the state, Steven Howell, of Dickinson Wright, made some closing statements in support of the Plan of Adjustment. “Although the filing of Chapter 9 has not been popular, there’s no question it was the right thing to do,” Howell said. “In this confirmation hearing, many of the city’s witnesses has since testified to the strides the city has made in improving services to its residents. … We cannot allow the city to fall back and continue its downward spiral.”
The state is providing $195 million to the city’s two pension funds and has financial oversight of city operations and pension fund management, according to terms of the Plan of Adjustment that were passed by the Legislature and signed by the governor earlier this year.
Also in the courtroom audience: Rep. John Walsh, R-Livonia, who chaired the committee that first considered the “grand bargain” bills in the Michigan Legislature.
Judge Rhodes asked Bennett what he thought the two or three top risks were to the feasibility of the Plan of Adjustment. Here’s how Bennett answered:
Everyone recognizes that there has to be flexibility in implementing the (restructuring initiatives) going forward, and it’s impossible sitting here in 2014 to decide exactly how money is appropriated in like 2018 or 2019 should be spent. I know that your Honor has confidence in Mayor Duggan and his administration – it’s a very impressive group. We don’t know how long they’re going to stay. We have to make guesses about who’s going to be there in the future. I would say the risks that are controllable are sticking with the plan and using the money, the huge amount of budget surpluses are projected and earmarked … earmarked for critical investments in critical areas. To the extent that they’re deployed or adjusted in any way, it’s got to stay for that: critical purposes in critical areas that may evolve over time to a degree but what we don’t need is the use of that money for other purposes that someone might decide is more politically expedient.
Bennett also said a risk is if there is misspending or the perception of misspending of the $1.7 billion budgeted over the next decade for improving city services. “Either would be a huge problem,” Bennett said.
He also said the city needs to regularly invest in critical infrastructure and services, for example, an information management system.
When Rhodes asked about how the city can ensure pension obligations are met, Bennett said:
The national labor organizations have to put pension funding high on the bargaining list.
Before breaking for lunch, Judge Rhodes told Bennett he wanted him to clarify what the plan intends to do with respect to 1983 claims. The “1983” refers to the Civil Rights Act, and the creditors include litigants who have lawsuits against the city relating to, for example, police misconduct and wrongful convictions.
Here’s some background about those cases:
The presumed interest rate for pension investments was an often-visited topic during witness testimony during the bankruptcy trial, and Bennett re-visited it during his closing statements.
(The Plan of Adjustment sets the presumed rate of return at 6.75 percent, which is at the low end of large public pension funds nationally.)
Bennett said in his closing arguments that the interest rate should be considered a reflection of how much risk the city is taking, and given the city’s situation, having low risk is the “reasonable” approach.
Bennett made an economic, cause-and-effect argument against the city raising taxes to pay debt, as some creditors had suggested during the trial.
“Municipalities in today’s world are really competitors with other municipalities,” Bennett said. “It’s happening every day when people are deciding where they are going to live. … It’s important: what does the community offer and what does it cost to live there.”
He recounted Mayor Mike Duggan’s testimony, who said the city is just “10 percent” of where it needs to be in terms of providing city serices.
“He started talking about the fact that people are going to compare us with what’s going on in the suburbs,” Bennett said. “Your Honor … in many places we have shown you that Detroit’s taxes are the highest of any city in Michigan and in places we’ve shown you and the record has shown you that our services are not. … Far from it, unfortunately. Hopefully we’ll get there.”
Raising taxes would only drive away residents, Bennett said, and existing ones may choose to not pay any more.
“We already have a delinquency problem. It would only get worse,” he said.
Raising taxes to generate more income is “not sensible” for Detroit, city attorney Bruce Bennett said.
He reviewed testimony that the Michigan Legislature is not likely to pass measures that would allow Detroit to raise taxes, a necessary provision because the city is near its taxing limits under state law.
“I think we all know that to be right,” Bennett said.
The city did “extensive” work to determine how to monetize its assets to reduce debts, sometimes paying creditors, sometimes creating other deals, city attorney Bruce Bennett, of Jones Day.
One example: “The entire cost of Belle Isle came off the city’s books. Therefore, money was saved … and generated to be used for other purposes,” Bennett said.
He also discussed the creation of the regional water authority, the Great Lakes Water Authority, which was a product of bankruptcy-related negotiations about the future of the Detroit Water and Sewerage Department (DWSD).
“The city looked at DWSD from a variety of different perspectives,” Bennett said, with a focus on raising money for the city’s general fund.
“Certainly the city did tons of work in this area. Others, of course, had very strong views about whether DWSD or any part of DWSD’s value could ultimately make it to the general fund because of its special status essentially as a utility that performs work for fees.”
But not every city asset was part of a settlement in the case, Bennett pointed out. He cited the Coleman A. Young International Airport, commonly known as City Airport.
“There really isn’t an immediately available alternative but it has to be kept alive for other good reasons. So that’s a failure, couldn’t accomplish anything significant there but it wasn’t for lack of trying,” Bennett says.
City attorney Bruce Bennett, of Jones Day, is addressing the reasons why the Detroit Institute of Arts collection does not need to be sold to pay debt. He recounted what some of the witnesses said when they testified earlier in the trial.
“There really isn’t a dispute that the DIA is a nationally recognized cultural institution that contributes to the city. It contributes to the image of the city. It contributes to the city’s rehabilitation. It might even contribute to bringing residents back,” Bennett said. “It is most assuredly a reasonable decision for Detroit to make to keep a world class art museum.”
Judge Rhodes interrupted Bennett’s statement to pose a question.
“What do we say to the pension claimant whose pension is impaired as a result of that decision?” the judge asked.
“We say to pension claimants in this what we say to other creditors,” Bennett said. “There’s no law that says a pension creditor has to be paid by causing a city to sell its assets.”
Judge Rhodes has taken a break to take a phone call. He also requested a meeting in the jury room with city attorney Thomas Cullen, of Jones Day, and a representative from the city law department.
He’ll resume closing arguments at 10 a.m.
“I think many of our pro se objectors do object to the DIA settlement in the way that it protects the art in this context, in this bankruptcy, from their pension claims,” Rhodes said.
“I’m going to cover it. We’ll cover it very thoroughly,” Bennett said.
City attorney Bruce Bennett told Judge Rhodes that the Detroit bankruptcy case proves that municipal bankruptcy is not about simply distributing city assets to pay claims. Bennett praised the settlements the city’s reached with creditors – totally about $7 billion of the city’s $18 billion in debt – because they don’t sell off the assets.
“Instead they are deployed in a way they are used only in the context that the creditor receiving the asset is going to have to invest money, participate in the city’s rehabilitation in order to extract assets,” Bennett said.
For example, the FGIC settlement includes the bond insurer, or its development partner, receiving the land where the Joe Louis Arena currently sits, with the provision they will develop the site as a hotel, office and retail space and condos.
City attorney Bruce Bennett, of Jones Day, began his closing argument by pointing out how quickly the Detroit Chapter 9 case moved from filing to trial conclusion … and why the speedy schedule is good for the city.
“Few if any press accounts about this case, and frankly even every article about the city of Detroit published outside the city of Detroit, refers to the fact that the city is in bankruptcy case,” Bennett said. “This isn’t good. It isn’t helping. It doesn’t do much to attract residents and business to the city, which as we’ll see later is extremely important to the city’s overall recovery.”
Finishing the bankruptcy trial is important for the city’s image, Bennett said.
“Even today many people who read articles which have reported the parade of settlements, … don’t fully understand the extent of progress already made or fully understand that the end really is in sight,” Bennett.
He repeatedly praised the relatively short time frame from filing to today’s closing arguments.
“It was a priority very early on for the debtor, the emergency manager, the entire professional team that we were going to put his case on a fast track,” Bennett said. “We think we’ve succeeded in this regard with your help. … The fact that we’re going to have an ultimate conclusion in this kind of time frame is terrific.”
The Plan of Adjustment now is “very broadly consensual” Bennett said, with all major financial creditors supporting it.
“Of course the case did not start out that way. It’s hard to think of any major constituency that was not involved in major litigation concerning some aspects of its rights with the city,” Bennett said.
Before closing arguments began, attorneys for bond insurer Financial Guaranty Insurance Co. and holders of some pension debt reported they had finalized a settlement with the city.
“Just in the nick of time we’ve resolved each and every one of the pending issues. We, did reach agreement on language that reservation of rights language, that would go into the confirmation order,” said Alfredo Perez, FGIC attorney from the Weil Gotshal & Manges firm.
FGIC also filed an updated term sheet, which was read into the record.
Department of Financial Services waived notice period so FGIC has the ability to enter into the settlement, Perez said.
Jonathan Wagner, of Kramer Levin, who represents holders of about $1 billion in pension debt through the Certificates of Participation, said his clients also were now supporting the city’s Plan of Adjustment.
“I don’t think there’s any suspense here but i’m happy to report that we’r withdrawing our objection,” Wagner said. “My two-hour statement is now reduced to zero.”