UPDATE: Roger Penske testified, and we had our first individual objector question Detroit Emergency Manager Kevyn Orr.
At the start of the morning, after discussions about the court schedule and witness order, Detroit Emergency Manager Kevyn Orr was back on the witness stand. Attorneys for bond insurer Financial Guaranty Insurance Company will skip their cross examination of him, but Judge Steven Rhodes will ask questions. Court is only scheduled to run until 12:30 p.m. today. We’ll have updates until then.
Miller Buckfire investment banker and city consultant James Doak, currently testifying, supports the portion of the Syncora deal that includes the company’s operation of and investment in the Grand Circus Park garage.
“The city gets further private sources to revitalize the city,” he said.
Doak said the garage has great potential but needs an outside investor to make the improvements and manage the operations. “The objective factor that I would cite at that level is everything we’ve seen to date does not suggest the parking department can do that. We’ve had difficulty getting adequate due diligence from the parking department, trying to get information,” Doak said.
In addition, the garage doesn’t have a lot of value in its current condition and will benefit from the renovations, part of the deal with Syncora.
“Our preliminary conclusion with regards to this garage is it’s one of the worst cases, poorer garages as far as its current circumstances. It clears only half a million dollars a year and it has been sorely undermaintained, and we estimate based on (a consultant’s) work that it will require over $13 million of remediation over the next 5 years to fix the structure of the facility.”
City attorney Thomas Cullen, of Jones Day, asked Miller Buckfire investment banker James Doak about whether city-owned land, one of the assets listed in the city’s Disclosure statement in the bankruptcy case, could be used to raise money.
“City-owned land was not going to produce material value in the restructuring process in a way that would materially affect the outcome of the restructuring process. The values were insufficient for Miller Buckfire to devote restructuring energies to marketing this land in small or large swaths, as it would be, and the existing infrastructure or infrastuctures that was getting designed to monetize or otherwise push land back into the private market would be better suited for the task at hand, things like the Land Bank … working with the DEGC,” Doak said.
He said the development agreement was a fair deal for the city and did not provide Syncora special treatment.
“There’s no sweetheart deals in this,” Doak said.
In his testimony, Miller Buckfire investment banker James Doak reviewed a list of assets the city provided to creditors that it might be willing to monetize in “value-enhancement opportunities,” as they say in court. The list included: the Coleman A. Young Airport (also known as City Airport), the Detroit Windsor Tunnel, city-owned land, parking operations and Joe Louis Arena.
For all of the assets, Miller Buckfire “evaluated the natural buyer pool that could be expected to engage with the city and come to a successful conclusion with regards to a transaction,” Doak said. The city’s creditors in the bankruptcy case were considered as potential buyers.
Doak testified about the Syncora settlement, which includes extending a lease to operate the Detroit Windsor Tunnel to a Syncora subsidiary. Doak called the arrangement “a reasonable exercise of the city’s business judgment.”
He also said the tunnel is an unusual, if aging asset, and there were other challenges realizing how the tunnel could be monetized in the bankruptcy case. “We also immediately encountered a tremendous absence of information at the city. The city was only entitled to receive summary audited financials from the company and the lease calculation on an annual basis, and the tenant had no obligation to provide carbon copies once it had already sent those materials on,” Doak said. “The city could only monetize its half of the tunnel and it could only do so after the current leases expired.”
He said no other businesses expressed interest in the tunnel operations.
The agreement with Syncora provides for the city to get more information about the tunnel, its condition and its problems. Under the current arrangement, negotiated during the Kwame Kilpatrick era, the city lacks information about the tunnel.
Doak did his own research in analyzing the deal.
“According to the Customer Officer that I discussed this with, it leaks occasionally. The status of the membrane, which would be expected for a tunnel of this age, is one that must be constantly maintained and examined, and it’s reasonable to expect, and we’re aware of that, that will be something that the parties continue to focus on as well as other elements of the tunnel, including the ceiling element.”
Let’s go back to Orr for a minute and catch up on the last question Judge Rhodes asked him: Why not monetize the art?
Here are excerpts of Orr’s answer:
“Your Honor, some of the discussion yesterday showed the evolution, in fact some of the email from where we started to where we are now in addition to my understanding that under PA 436, the state (emergency manager) statute, in addition to Section 904 of the Federal Bankruptcy Code, the debtor is not obligated to monetize anything.”
“I do believe a one-time sale of city assets, even of cities in distress, is detrimental to the long-term business of the city, particularly the Detroit Institute of Art. That is one of the most significant cultural institutions, and I believe sincerely it would harm it irreparably (if art was sold.) The millage would be revoked. Other museums would not do business with the DIA, both nationally and internationally, maybe not forever … My understanding is that the endowment effort they had has taken a bit of a downfall as people wait to see what’s going to happen. There would be harm from a one-time sale of assets.”
“A one-time sale would be very problematic.”
“Although there have been other discussions about selling the art … the grand bargain that we pulled together through the mediation process … provide some value that I did not have at the beginning of this.”
Another Miller Buckfire investment banker is on the witness stand: James Doak. He’s the firm’s managing director and is being questioned by city attorney Thomas Cullen, of the Jones Day firm. They’re discussing, in hypothetical and theoretical terms, how municipalities or corporations in bankruptcy determine whether to sell assets.
After pensioner Estella Ball finished questioning Orr, Judge Rhodes allowed her to testify for five minutes. Here are some highlights of what she said:
“I really feel nobody is representing the true city of Detroit … There have been so many adjustment, I admit I’m lost but one thing I am opposed to is the third party relief of the state of Michigan. I believe there was collusion from the state to send the city into bankruptcy by state officials and other powers that be. … Through state policies they decided to give Detroit a push over the edge and when we still didn’t fall over they sent Mr. Orr in to push us over the cliff. “
She called the emergency manager a “public king lording over the city of Detroit, usurping the power of elected officials, negating my right to vote.” The emergency manager era, she said, will continue “the oversight of the state over every aspect of the city of Detroit for decades, making Detroit a feudal city under the control of people who do not live here.”
Ball also criticized the number of contracts to consultants and private contractors.
“Very few are Michigan companies and very few are Detroit companies,” she said. “The bottom line is that this is a redistribution for the resources of Detroit into the hands of persons who do not live in Detroit. No matter who I vote for or who wins the election, it is of no effect. This is a violation of the Voting Rights Act.
The bankruptcy case’s effects, she said, “smack of the Jim Crow laws. They will have the same devastating effect on people of color that they did hundreds of years ago. I understand these questions are not necessarily before the court,” she said.
Retiree Estella Ball was the first of the individual objectors – people without attorneys, representing themselves – to appear at the trial. She questioned Orr, mainly about the Plan of Adjustment’s provision that recoups certain annuity monies from pensioners.
Here’s a previous post about the Annuity Savings Fund recoupment, as it’s commonly called.
Ball asked Orr why it was necessary to collect the money from pensioners. He gave an example of how the annuity funds were credited with higher interest rates than they actually earned, with the difference being paid from the pension funds.
“In the year 2009, I think the (annuity) fund actually lost 19.7 percent but it was attributed 7.9 percent (gains) so that’s almost a 28 percent spread. So for instance, that one year, if there was a $10,000 investment, it was worth $8,000 but it was attributed at almost $11,000,” Orr said. “The thought was in the general principles of receivership, you try to recoup an amount of funds that were improperly distributed to the beneficiaries.”
In response to a question about why Roger Penske testified, he was originally listed as a city witness for the topics of Plan of Adjustment feasibility, the importance from a business and investment standpoint of the City’s ability to capitalize and build on the efforts contemplated in the Plan post bankruptcy, the importance and effect of addressing in the Plan, among other things, the City’s blight, public safety, and urban revitalization.
Here’s what Penske said about Detroit’s bankruptcy:
“We have to do it in order to get our city back to where it needs to be for people to live and work.”
Penske on a meeting with Mayor Dave Bing, where the mayor asked business leaders for help cleaning up parks and providing police cars and EMS units:
“After that meeting, I talked to the mayor and said I felt I could be a catalyst to go out in the private sector and get 100 police cars and also 23 EMS units. I’m happy to say with seven or eight phone calls, people said yes. In August last year, we started delivering the 100 police cars and 23 EMS units. We supported with capital and there’s also a piece that’s being funded over time and we’re supporting that with guarantees to the banks.”
When asked about the Grand Bargain, here’s what Penske said:
“The Grand Bargain, from my perspective, is really an umbrella. We’ve been able to take the pensioners, who have worked for the city, and take our gem, the art museum, and put them under one umbrella and find a way to fund the pensioners and keep the art assets in ownership and not have them sold to help us exit from bankruptcy. I feel good about it personally. … It’s a great opportunity to see the unity of the art assets and also the human capital assets, who have worked in the city before, as we go forward.”
City attorney Robert Hertzberg, of the Southfield-based Pepper Hamilton firm, is questioning Roger Penske, chairman of the Penske Corp.
He described his business as a “transportation service company in leasing and retail automotive,” with 40,000 employees and $18 billion in revenue.
Penske chaired the city’s Super Bowl efforts in 2006. He testified the event was the beginning of the downtown renaissance. “It started to bring people together. We have a thousand volunteers and people who really cared about the city,” he said.
Judge Rhodes asked Orr about the settlement with bond insurer Syncora, which provides for several development opportunities in prime areas of the city. The Bermuda-based company was one of the most aggressive adversaries in the bankruptcy case until the deal was reached last month.
Judge Rhodes: The Syncora development agreement appears to intensify and broaden the relationship between Syncora and the city. DO you have a sense as to how that relationship will be monitored and executed on the city’s side of it?
Orr: Yes, I’m hopeful that the marriage is better than the courtship. …
Judge Rhodes started by asking Orr questions about the Financial Review Commission, which would be part of the governance of a post-bankruptcy Detroit for at least 13 years. The state Legislature created the nine-member panel as part of the “grand bargain” legislation passed last Spring.
The commission “will provide a level of oversight that can be flexible according to the discretion of the commission itself,” Orr said.
Rhodes asked Orr about the representatives on the commission, which would include the Detroit mayor and city council president or their designees.
“In the current Financial Advisory Board, there are opportunities for the city to present, which occurs regularly, but there is no representing on that body,” Orr said. ““It was a good idea substantively to have representation from city officials on that commission.”
Judge Rhodes asked Orr about the future dynamics of having city officials or their designees on the oversight panel.
“My opinion is it is not so much dependent on whether the mayor or the city council president sits on the commission – there are nine members, they’re just two – my opinion is, depends on the commission to have access to data and to other department heads and city officials so that they get an unvarnished view” of city finances and operations, Orr said.
The Emergency Manager said he has a “high opinion” of the current city leaders, Mike Duggan and Brenda Jones. “We’ve seen instances in the past where that isn’t necessarily the case,” Orr said.
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.
Court is in recess until tomorrow, when Orr will return to the stand. Roger Penske is also expected to testify.
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.
After a short cross examination, Kresge CEO Rip Rapson is finished testifying. Creditors attorneys now will cross examine Kevyn Orr.
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.”
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.
“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.
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.”
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.
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.
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.
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.”
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.
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.
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.”
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.
Emergency Manager Kevyn Orr is expected on the witness stand later today but first up is billionaire businessman Dan Gilbert. Judge Steven Rhodes plans to have some motion hearings after Gilbert’s testimony. We’ll have updates throughout the day as city attorneys continue to make their case that the Plan of Adjustment is feasible and reasonable as a guide for Detroit’s exit from bankruptcy.
Here’s more from Orr’s testimony about settlements the city reached with creditors:
*As a component of the state contribution agreement it was very important to state officials that no retiree be “pushed into poverty,” Orr said. So a portion of the Unlimited Tax General Obligation Bonds settlement was used for an “income stabilization fund” that would be used to restore pensions if they were cut below 130 percent of the federal poverty level.
*The Limited Tax Obligations Bonds had an outstanding amount of about $155 million when the bankruptcy petitions was filed. Like the UTGOs, there was a dispute with bond insurers. Here they were Ambac and Black Rock. “Very similar theories (to the UTGO-related litigation), but LTGOs weren’t able to allege a dedicated millage,” Orr said.
The city also defaulted on LTGO payments in October 2013. The insurers sued the city, claiming there were special liens and other guarantees of payment, according to his testimony. “They had competent counsel who could pursue those claims,” Orr said. “They know how to litigate.”
Orr said he knew the litigation would be intense, lengthy and costly with the bond insurers. “They struck me as highly motivated to go beyond the issue here but to drive that home what they perceived to be the precedential value of the issues in this case,” he said.
Settlement negotiations proceeded.
And that’s where testimony ended today.
In his testimony this afternoon, here’s what Orr had to say about some of the settlements reached in the case:
* All but one of the settlements with creditors reflected in the eighth and latest version of the Plan of Adjustment were reached through mediation, Orr said. “I’m still somewhat amazed we reached some of the settlements we have but I’m not sure we would have reached tem without mediation,” he testified
* Valued at about $388 million, the Unlimited Tax General Obligation bonds were a series of bonds issued by the city that “in the creditors’ view” were backed by a dedicated millage, Orr said. “It was a significant sum of money,” Orr said. “We eventually defaulted on our payment in October 2013.”
Chatter, letters and demands with the bond insurers followed “but eventually they sued us,” Orr said. A settlement was reached. But city attorney Greg Shumaker asked Orr what would have happened if one hadn’t been.
“The litigation just out of the box was pretty vigorous, there was a lot of paper flying back and forth,” Orr said. “It was a pretty heated, contested piece of litigation.”
* No settlement has been reached with Financial Guaranty Insurance Company but Orr hopes to have one.
City attorney Greg Shumaker, of Jones Day (Orr’s former law firm), is asking Orr about the city’s Plan of Adjustment, the blueprint for restructuring debt and operating post-bankruptcy.
The plan reflect settlements, restructuring and reinvestment initiatives that “we worked on,” Orr said.
Shumaker asked him who the “we” was.
“I suppose it’s the ‘royal we’,” Orr replied, getting us our first Big Lebowski reference I’m aware of in the bankruptcy trial.
Orr said he didn’t think the city’s 2013 bankruptcy filing should have surprised anyone.
“From my view on July 18, all of those had been firmly established by the people that live here and work here,” he said. “There have been a lot of costs to the city, the issue was ripe, and it was time to move forward to a reasonable plan so we could get out of this.”
After the bankruptcy petition was filed in July 2013, Orr said he was “forthcoming about the financial condition of the city” and he began negotiating with creditors about to try and resolve their claims.
PA 436 (the state’s emergency manager law), Orr said, required him to restore financial and fiscal stability to municipalities in Michigan that are in financial distress and emergency. But he also decided not to use all the powers the law gave him: replacing pension boards, for example, or seeking approval with an election process to raise taxes.
(That’s an issue that’s been raised by creditors during the trial as an option the city should consider so more money would be available to them.)
“We’re at the maximum tax rate and millage,” Orr said, adding the city is nearly at its maximum legal tax rate, has an impoverished population and has a high unemployment rate. So that option “didn’t seem reasonable.”
Orr said early on he met with labor representatives and heard their concerns about wages, pensions and health care. But since the city paid nearly all retiree health care out of pocket and about 40 percent of the city’s expenses went to legacy costs (pensions, health care and debt service), Orr said he had to deal with costs related to employees and retirees.
“We knew that with the current rate of increase, in the next nine years, legacy costs are going to rise 73 percent,” he said. “Retiree health care would be 50 percent of that.”
Orr said the state’s emergency manager law dictated what he did. “We knew the trajectory of where the city was was not sustainable, and the statute required me to put the city in a sustainable fashion at the end of my appointment,” he said.
Orr also described the hostility he faced when he started as the city’s emergency manager, which coincided with the sentencing of former Mayor Kwame Kilpatrick. “The city has gone through a lot of trauma,” Orr said. “There were a lot of rumors about what I was going to do.”
Those included that he was here to sell off assets or “carry out the ill will of Gov. Snyder,” he said. “There were a lot of animosity, some hostility. Some people would tell me pretty straightforward, using vernacular, they didn’t appreciate that I was in town,” he said.
Orr described a group of people who would stand outside his office with packs of Oreo cookies. “My last name is Orr. I’ve heard that before,” he said. “I’d say, ‘If you brought milk, we’d have a snack.’”
In response to a question from a city attorney, Orr described his relationship with Mayor Mike Duggan. “That has evolved from one that was a little standoffish at the beginning…to one that I think is very professional and very respectful of each other,” Orr said.
Soon after his appointment, Orr said he met with hundreds of stakeholders in meetings set up by the state. Some of those included city creditors, and what they said surprised him.
“I guess with the city’s creditors it was the concept of how many were unwilling to come in and do business with the city,” he said. That had a “deleterious effect on the city’s ability to contact or provide services.”
At some point, discussion took place with the city’s vendors about the financial situation of the city and whether creditors would be paid in full. “Each of them felt their situation was special and they would not be required to take a hair cut,” Orr testified.
Orr’s earliest hires as staff in the Office Of the Emergency Manager included a special assistant, a senior advisor, a public relations director. Then, he said, he convinced former City Councilman Gary Brown to become the chief operating officer. He also hired a chief financial officer, a police chief and a deputy emergency manager.
Orr, who took the stand at 2:45 p.m., said public safety was his first focus when he started with the city. Police and fire both had unacceptable response times, outdated equipment and inferior technology.
Next priorities: public lighting, blight remediation and trash collection.
“Our trash services were poor. The city was trying to deal with solid waste on a regular basis but we did not have the capacity to deal with it throughout the city,” Orr said. “In addition to the blight, you would also see garbage in the streets.”
Two private contractors have been hired. The companies have scheduled regular bulk pickups, automated pick up and
“People on the street have come up to us and thanked us for dealing with trash,” he said.
City attorney, Greg Shumaker, of the Jones Day law firm, asked Orr to describe the condition of city services when he took office in March 2013.
“The city’s core provision of services were substandard. The city’s financial situation was obviously in dire straits,” he said. He listed specific departments that faced the biggest challenges: “public works, public safety and health, infrastructure and facilities, planning and development, the parks and rec…were in poor shape.”
Orr also answered a question about the city’s cash flow. “The city was in dire straits also in that respect,” he said. “It had an inability to meet its bills as they became due. Bills as simple as payroll.” There were bounced checks, and it sometimes took 180 days to pay vendors.
Here’s how Kevyn Orr described his current job title in one of his first answers to questions while he’s on the witness stand:
“I’m currently the Emergency Manager for the city of Detroit as recently revised.”
On the witness stand now: Brom Stibitz, director of executive operations at the Michigan Department of Treasury. He’s testifying, so far, about the oversight power the state has through the “grand bargain” legislation. That includes the Financial Review Commission created by the “The Michigan Financial Review Commission Act” and in place for a minimum of 10 years. It becomes operational, according to the Act, the day the Plan of Adjustment is enacted.
The commission is a nine-member panel that oversees Detroit’s fiscal operations including its finances, budgets contracts, collective bargaining agreements, debt issuance and revenue estimates. The commission includes the Detroit mayor, city council president, state treasurer, and director of the department of technology, management, and budget or a designee from any of those people. In addition, the governor has five appointments that will include at least one city resident. One of the five will come from a list provided by the Speaker of the House and one from a list provided by the Senate Majority Leader.
There is a $900,000 appropriation in the Act, which has not yet been spent. The money from last fiscal year, which ended yesterday, will carry forward for the next fiscal year, which begins today.
One position, the executive director, has been created to date, which reports to Chief Deputy Treasurer, Stibitz said. The position has not been filled because state officials wanted the commissioners, when they are appointed, to have a role in hiring the director.
The commission, Stiblitz says, also has to give reviews to the governor reports about the city. They will be posted online.
Here are some of Gilbert’s statements during his testimony:
On the Grand Bargain and why his companies are contributing $5 million to the city’s pension funds:
“If the Grand Bargain is able to help the city get through this bankruptcy faster and get the pensioners more of what they bargained for and saves the art and doesn’t force the art to be sold out of the DIA, I think that’s a triple win for everybody involved,” he said.
On the image of the city as defined by the issue of the Detroit Institute of Arts collection as an asset that could be sold during bankruptcy:
“For the assets of a museum such as that to be stripped and sold in bankruptcy would probably be a blow for the city of Detroit and its image. It’s an overwhelming challenge to change and get positive from everything that’s occurred,” he said. “It would be very, very difficult to get those images and hat concept past almost the public relations side which ultimately affects the economic viability of a lot of things that happen in Detroit … Every day we’re talking to investors from numerous places who come to Detroit, who go on tours, (who are thinking) should they move their offices, businesses, open up an office? Ultimately they all ask about the bankruptcy, and they ask about the DIA: “Are you guys really going to sell off some of that?’”
And more on that:
“An internationally acclaimed institution, such as the DIA, which is probably the single biggest culturally significant attraction in the city of Detroit and is prominent in national and international circles, for the vision or image of that kind of art being stripped and sold in a bankruptcy is an image and vision that I think would be overwhelmingly difficult to overcome, even post-bankruptcy for the effort of trying to get investment into the city and convince others of why Detroit is turned and going in the positive and correct and right direction.”
Let’s catch up with Gilbert’s first bit of testimony. Here’s what he said in answering attorney questions:
* He is chairman of Rock Holdings and Quicken Loans, the second largest mortgage company in the United States. His holdings include 109 individual companies, including two casinos, the Cleveland Cavaliers basketball team and several start-up businesses.
* His companies employ about 12,500 in Detroit, about 80 percent of whom live in the city.
* He has an undergraduate degree from Michigan State University and a law degree from Wayne State University.
* Gilbert, who lives in Franklin, moved his companies downtown because, first, their leases were up in the suburbs and second, he didn’t think the businesses would grow like they should unless they were in the city’s core.
* His company holdings include 60 structures in the city, totaling about 9 million square feet including parking. The cost: about $1.4 billion.
* He has invested in the M-1 rail line, which he expects will be operating in mid to late 2016.
Today’s first witness is billionaire businessman Dan Gilbert who for roughly eight months was the co-chair of the Blight Task Force. He said he was one of the main authors of the 380-page report. Gilbert described the group as focusing on residential blight, vacant lots and commercial properties located near residential neighborhoods.
“It did not include large massive commercial structures such as the Packard Plant or the train station,” Gilbert said.
Gilbert said his involvement in task force began with getting comprehensive information about blight in the city through research and visual inspections. That information was put into a database and connected with 24 other existing databases. “We put all that data together and got a very, very clear picture both from an information side from the databases and from the literal, visual side. We had no guesses any more. We had a very clear understanding of what was there and what was blight,” Gilbert said.
City attorney Greg Shumaker, of Jones Day, asked Gilbert his definition of Blight. “That can be a very vague definition,” he said, “depending on who you are and where you’re coming from.”
“We looked for best practices nationally,” Gilbert said. “We made all kinds of recommendations there.”
Addressing blight is one of the top four concerns for Detroit, Gilbert said, along with jobs, crime, and education. “I don’t believe we can fully address the other three until blight is removed from the city,” Gilbert said. “Blight is like a cancer. Blight grows. In other words, just like a tumor if you take out half the tumor, that’s probably not a great situation, the tumor tends to grow back.”
Blight, Gilbert said, describes homes that are “beyond repair, homes that needed to be taken down, demolished or removed piece by piece,” he said.
The Plan of Adjustment calls for about $440 million to be spent on blight removal in the city over the next decade.
Detroit Emergency Manager Kevyn Orr could take the stand today. But there are two witnesses ahead of him, according to city attorneys. First is Vyto Kaunelis, a consultant with OHM Advisors, an environmental, architecture and planning firm. He’s likely followed by Ken Buckfire, of the Miller Buckfire banking restructuring firm.
Here’s an interview the Detroit Free Press did with Buckfire last year.
After city and creditor attorneys finished questioning Buckfire, Judge Steven Rhodes had a few questions. As he is being asked to approve an additional $50 million in exit financing for the city, Rhodes had a few questions related to Buckfire’s opinion about what the borrowing costs could be on that loan.
Buckfire said the city could expect a spread of 25 to 50 basis points between asking for a secured versus and unsecured loan – a similar range to what he predicted would happen in the corporate market.
Fifty basis points, Buckfire said, would be “not an immaterial amount,” and he estimated that would equate to about $1.1 million a year for a decade in savings to the city.
In addition Buckfire offered a few nice soundbites as he answered the judge’s questions:
* “Some cities may have a higher credit rating but have not dealt with their unfunded pensions and OPEB (other post-employment benefits) liabilities like Detroit has done.”
* “The new Detroit story has not yet been vetted by experience.”
On re-direct, city attorney Thomas Cullen, of Jones Day, followed up on FGIC attorney Ed Soto’s question pointing out that Buckfire did not do an analysis of what would happen if the city’s bankruptcy case was dismissed. Cullen asked WHY Buckfire did not do such a review.
“The condition of the city prior to the bankruptcy I thought addressed it very well. In the case it was dismissed we’d be back to where we were before,” Buckfire said.
In short: $18 billion in long-term debt on roughly $1 billion annual revenues with roughly 40 percent — and growing — of the city’s annual budget servicing debt. Plus, Buckfire said, the city would have to pay for the pension funding “swamp settlement” and its post-petition financing, amounts that were not included in the bankruptcy petition and totally hundreds of millions of dollars.
After city attorney Thomas Cullen, of Jones Day, finished questioning Buckfire and walking him through explanations of the city’s post-petition financing, exit financing and position in markets, creditors’ attorneys had time to cross examine him. First Ed Soto, attorney for bond insurer FGIC, asked about a range of topics including whether Buckfire included the Detroit Institute of Arts assets in his analysis (he didn’t) and what ranges of recovery creditors could expect.
Then came Debra O’Gorman, a New York-based attorney representing the Macomb County Public Works Commissioner, Anthony Marrocco, who continues to object to the city’s Plan of Adjustment because of a $26 million claim regarding the Macomb Interceptor Drain. Here’s some background on that issue. O’Gorman questioned Buckfire about the Syncora settlement, the Downtown Development Authority and the exit financing.
A buzzing noise has caused a recess in the trial until 3:30 p.m.
Buckfire is back on the stand for the beginning of the afternoon court proceedings. An attorney for bond insurer Financial Guaranty Insurance Company (FGIC), Ed Soto, is questioning him about whether he considered the city-owned portion of the Detroit Institute of Arts collection when he valued the city’s assets.
FGIC’s claim in the city’s case is about $1.1 billion through the pension Certificates of Participation. Following testimony yesterday about what possible settlement exists for the company, both of Detroit’s daily newspapers today published articles about the status of such a deal. Here is the Detroit Free Press story. Here is the article in The Detroit News.
In Buckfire’s first roughly 80 minutes on the stand, he said:
* Maintaining and increasing tax revenues is a “crucial” issue for the city. “The ability of the city to maintain tax revenue stability is going to be, ultimately, the most crucial element of the revenue story,” Buckfire said.
* Detroit was the first debtor in a municipal bankruptcy to seek post-petition financing, and it was “four times oversubscribed.” “The market, I believe is reaccepting Detroit’s credit which means the question about (interest) rates is not longer a question about viability in the city. If that was still an issue, you’d be paying very high rates,” Buckfire said.
* The city’s post-petition financing was “at the lowest possible price,” and there was great market interest. “They had four times as much demand for these loans as they needed to sell it. … Most of the buyers were not what I would characterize as normal participants in municipal finance markets. They were not hedge funds. Thy were not people coming in here looking to make a fast 10 points.”
* “The annual cost of servicing those obligations over the next 10 years will have a high level of certainty,” Buckfire said. “That’s an important factor for the credit markets. … A lender to the city post-bankruptcy will have a very high level of confidence because there’s no refinancing requirement during the first 10 years.”
* The success of exit financing including “proving to the market that in fact the borrower is not likely to go back into bankruptcy. That’s always the core requirement of a new lender to a situation, and we have to prove that adequately in order to raise capital at the lowest cost,” Buckfire said.
* Reducing the city’s obligations to pay pension and retiree health care costs (also known as Other Post-Employment Benefits or OPEB) was a key element to attracting loan backers. “It was crucial because it eliminated the risk that those contribution costs would have to be dealt with in the annual budgets,” Buckfire said.
* The reduction from $10.4 billion to $3.1 billion of unsecured debt has also attracted market interest. “We have fixed the cost of serving those liabilities for 10 years with a high level of certainty,” Buckfire said. “I would actually argue that the credit of Detroit will be higher than the credit of most other major cities which have not deal with their unfunded OPEB liabilities.”
Buckfire testified he supplemented his first report, filed in July, with the Detroit Water and Sewerage Department bond tenders and the $325 million exit financing (up from the original $275 million deal because it includes a $50 million payoff of limited-tax general obligation bond obligations). “That was not in evidence at my original report date. Those are the two most important things,” Buckfire said.
According to the report Miller Buckfire is paid $300,000 monthly by Detroit and “will receive a $28 million restructuring fee, less a credit for certain amounts previously paid to Miller Buckfire, upon a recapitalization or restructuring of the City’s debt securities and/or other indebtedness, obligations or liabilities, including a plan of adjustment.”
Buckfire’s New York-based firm first contracted with Detroit during Summer 2012 when it did a 60-day evaluation of the city’s financial condition. “That was designed to provide to the state and to the city leaders an independent assessment,” Buckfire said.
In January 2013, Miller Buckfire started to analyze and advise the city about its “overwhelming financial problems,” Buckfire said. Fifteen bankers were part of the team.
“The city needed to reinvest in appropriate activities,” Buckfire said. The priorities? Stabilizing the tax base and attracting new residents and businesses.
Miller Buckfire helped to analyze the city’s debt capacity in part, to understand what Detroit would need to spend to “restore its solvency,” Buckfire said. “I’m very optimistic from a debt capacity point of view that we have maximized what the city can borrow.”
After nearly two weeks off so creditors could react to settlements reached in the case, Detroit’s bankruptcy confirmation hearing resumes today. Up first on the city’s witness schedule: financial analyst Gaurav Malhotra. Emergency Manager Kevyn Orr is scheduled for later this week…perhaps as early as tomorrow.
Court is concluded. The first witness tomorrow will be Ken Buckfire, of the Miller Buckfire banking restructuring firm, followed by Vyto Kaunelis, a consultant with Ohm Advisors, an environmental, architecture and planning firm, and Detroit Emergency Manager Kevyn Orr.
Under questioning by Ed Soto, an attorney for bond insurer Financial Guaranty Insurance Company, which has a roughly $1.1 billion liability in Detroit, Malhotra said he had not considered privatizing services or selling art from the Detroit Institute of Arts collection to raise revenues for the city in doing his financial forecasts.
Malhotra also said Ernst & Young will continue to consult for the city until December 2015. They work on financial forecasting and human resource systems.
A few more tidbits from Malhotra’s testimony:
*The $194.8 million the state will put into Detroit’s pension funds will be split nearly evenly between the two funds: $96.0 million to the Police and Fire Retirement System and $98.8 million to the General Retirement System.
*Without restructuring, the city would have been putting about 26 percent of its annual budget toward retiree health care by 2033, Malhotra said. The bankruptcy plan reduces that amount to between 2 and 4 percent.
*Under questioning from city attorney Geoff Stewart, of the Jones Day firm, Malhotra said Detroit’s future budgets will comply with new state law that requires municipalities to set aside 5 percent of previous year’s expenditures. “Based on these assumptions, the city should be able to maintain a cash balance consistent with these assumptions,” Malhotra said.
Malhotra is continuing to testify about the financial impact of settlements. For example, the city is reducing its obligation for retirees’ health care from about $4.3 billion to $450 million. A $450 million note will be issued and Voluntary Employee Benefit Associations will administer health care both for police and fire retirees and general service workers.
“The city is not exposed to OPEB (Other Post-Employment Benefits) any longer beyond the commitment that it’s making,” Malhotra said. “The city’s obligations are limited to its servicing the B notes.”
Malhotra also said the city has outlined some terms of a settlement to bond insurer Financial Guaranty Insurance Co. (FGIC).
“FGIC has an option to opt in to a similar or the same settlement as Syncora but I don’t know all the details,” he said.
To create revenue projections, Gaurav Malhotra said he relied on the work of several experts and documents, including Robert Cline, Caroline Sallee, the Ernst & Young Restructuring Team, Charles Moore, from Conway MacKenzie, Ken Buckfire, from Miller Buckfire, and the Plan of Adjustment, specifically the “Grand Bargain” funds. All of the people have or will testify in during the bankruptcy trial.
To create expenditure forecast, Malhotra said he worked with mainly the same experts as well as city officials to determine the city’s operating and legacy costs.
Now testifying: Gaurav Malhotra is principal and senior managing director in the restructuring practice at Ernst & Young in Chicago. His initial role when he began working with Detroit three years ago was to assess the city’s short-term cash flow situation. In Spring 2013, Ernst & Young’s role changed to look at longer-term financial projections for the city.
The city has paid more than $20 million to Ernst & Young, according to Malhotra, with the bulk of that during the bankruptcy. Since the bankruptcy petition was filed, the city has withheld 10 percent of Ernst & Young fees. But if the Plan of Adjustment is confirmed by Dec. 31, the city will pay the 10 percent, Malhotra said.
Best Tweet about Malhotra came from Rob Snell, of The Detroit News.
Serial bankruptcy witness Malhotra has testified so often u can tell when he’s had a haircut. Used 2 look like pic.twitter.com/B95XTLaqqp
— Robert Snell (@RobertSnell_DN) September 29, 2014
Before the trial resumed, Judge Steven Rhodes heard a motion that would have allowed Robert Davis and a group called “Citizens United Against Corrupt Government” to pursue a lawsuit in state court against the city for an Open Meetings Act violation based on how the city council conducted its talks regarding Emergency Manager Kevyn Orr’s transition. After short oral arguments, Rhodes granted the motion and will allow the lawsuit to proceed.
“There are certainly aspects of the claimed violations of the Open Meetings Act that are moot but it appears that there are aspects that are not moot,” Rhodes said. “For example, the motion states that if the circuit court were to find a violation of the Open Meetings Act, the plaintiffs would seek disclosure of certain materials relating to the closed meeting such as minutes, transcripts, etc.”
Rhodes also dismissed the city’s argument that the request was frivolous.
“The claimed violations of the Open Meetings Act is not a frivolous claim. If it were, the Court would not grant relief from the stay since no party should be required to defend a frivolous action. The claim is not frivolous. The city has a defense to it, perhaps even a strong defense, but the claim itself is not a frivolous claim,” Rhodes said.
Judge Steven Rhodes this morning denied a request to halt the water shutoffs to thousands of customers with past due bills.
“The harm to the city would be significant,” he said.
Following the two-day evidentiary hearing last week, Rhodes read his decision from the bench before the bankruptcy trial proceedings resumed. He said he would enter a written order.
Rhodes called the city’s “10-Point Plan” that helps customers “a bold, commendable and necessarily aggressive plan” that appears to have “been generally successful.” But he also pointed out that it’s “less clear” that the plan will be of any assistance to those too poor to pay water bills.
“This program has led to a significant number of service restorations,” Rhodes said. “There remain, however, thousands of customers whose service was terminated and not restored.”
Rhodes agreed with the plaintiffs – a group of water customers, attorneys and welfare rights groups – that irreparable harm occurred when water service is halted. But he also said “significant harm” could occur to the city if the six-month stay was granted. “The last thing it needs is this hit to its revenue,” Rhodes said.
Following the judge’s ruling, the Detroit Water Brigade issued a statement, condemned Rhodes’s decision and said members would “initiate a sustained and escalating campaign of nonviolent direct action with a simple demand: that water be restored to all the people of the City of Detroit.”
The city filed a new witness list indicating who will be on the stand next week when the trial resumes. Up first, financial analyst Gaurav Malhotra and restructuring expert Ken Buckfire. Mayor Mike Duggan is the last planned witness.
Here’s the full order:
Detroit Emergency Manager Kevyn Orr is transferring control of the city’s government back to its elected officials, a major shift of power in the city that’s still in bankruptcy proceedings.
Orr’s order, which details the role he will play and what powers he will have, came after 16 hours of closed-door negotiations involving him, the bankruptcy case’s chief mediator, Mayor Mike Duggan, City Council and other officials. Under Michigan law, the city council could have voted to remove Orr with a two-thirds vote.
Orr will continue shepherding the city through the historic Chapter 9 case, the largest ever municipal bankruptcy. Duggan says he will now, finally have the authority to do the job he was elected to do. “While I had a good professional relationship with Mr. Orr, every single action I took was still subject to his approval,” Duggan says.
Orr will retain the title of emergency manager until the city’s plan to exit bankruptcy is approved and implemented.