Bankruptcy Trial

  • Day 20: Detroit’s Bankruptcy Trial

    The city and several creditors announced some major settlements today in the bankruptcy case. Here’s what’s happening:

    10:39 a.m.

    A few more items from this morning’s session:

    Detroit Emergency Manager Kevyn Orr says the city’s attorneys and consultants will contribute back $5 million toward the settlements.

    Court will be in recess until Tuesday morning.

    Here’s the settlement agreement, filed in bankruptcy court this morning.

    10:25 a.m.

    While the settlement between the parties is big news, a few more hurdles need to be jumped:

    Detroit Emergency Manager Kevyn Orr said he will ask the city council to approve the deal as early as next week. “I hope I could appeal to their good graces,” Orr told Judge Steven Rhodes.

    An attorney for the holders of the pension debt certificates, Thomas Moers Mayer, said he has not seen the settlement documents and term sheets and needs to take it to his clients. He said he expects they will be similar to what has been previously negotiated, but with some acceleration of payments, the differences may be material. “We just won’t say yes now,” Mayer said he was told by his client. “There is a chance I’ll have to come back and make some oral arguments if my guys see the documents and there is some problem.”

    10:20 a.m.

    City attorney Corrine Ball, of Jones Day, called it “big news” before she summarized the agreement the city reached with bond insurer Financial Guaranty Insurance Co. and holders of pension debt.

    In part, it includes plans for tearing down the Joe Louis Area and redeveloping the riverfront west of the site. Ball said the development could include condos, a hotel and retail site that would support conventions at Cobo Hall.

    As with bond insurer Syncora, which settlement its $1.4 billion claim last month, the city and FGIC will create a “Development Agreement” that will include “credits” toward future purchase of city assets. FGIC also receives bonds from the B notes and new C note classes in the Plan of Adjustment.

    “We think it’s a very subtantial settlement for us,” said Alfredo Perez, FGIC attorney.

    10:00 a.m.

    The first settlement reported today was between the city and the Macomb County Public Works Commissioner, Anthony Marrocco, who had a $26 million claim related to construction and repairs of the Macomb Interceptor Drain Drainage District.

    The settlement lowers that amount to $22 million and resolves other litigation. The commissioner’s objection to the city’s Plan of Adjustment will be dropped.

    “Thank to you and everyone for your hardwork in achieving this settlement. Please extend my special thanks and appreciation to Mr. Marrocco,” Judge Rhodes told that attorneys.


  • Day 19: Detroit’s Bankruptcy Trial

    It’s fewer attorneys and more pensioners today in bankruptcy court. Judge Steven Rhodes has scheduled several “pro se” objectors who will testify and question witnesses. Pro se objectors are individuals without attorneys, and today’s hearing will include their opposition to parts of the Plan of Adjustment.

    One of them already appeared: Estella Ball questioned Detroit Emergency Manager Kevyn Orr on Day 16 of the confirmation hearing.

    10:22 a.m.

    After she questioned Emergency Manager Kevyn Orr and city attorney Heather Lennox, of Jones Day (see below), city retiree Wanda Jan Hill had a few minutes to testify.

    She told Judge Steven Rhodes that he should “strike the 6.75 percent interest rate from the clawback” of annuity payments some general service retirees will make as part of the bankruptcy settlement.

    “Just as deals or adjustments were made for Syncora and FGIC and I can sort of say the police and fire, Id’ like for you to strike a moderate deal with the retirees. I’d like for you to allow Mr. Orr or someone in his camp to provide us with information about the makeup of this clawback. … There are a lot of questions that are not answered that we need to know. “

    Here is Hill’s objection filed last summer against the city’s Plan of Adjustment.

    10:05 a.m.

    With city attorney Heather Lennox on the witness stand, retiree Wanda Jan Hill continued her questioning about if and how retirees were notified about the 6.75 percent interest rate attached to retirees’ annuity savings fund recoupments before they voted on the Plan of Adjustment earlier this year.

    According to Hill, the ballots relied on the term “other factors” and did not disclose a 6.75 interest rate would be part of retirees’ payback of some of their annuity savings funds to the city. After Emergency Manager Kevyn Orr couldn’t sufficiently answer Hill’s questions (see below), Lennox took the stand to discuss the issues Hill raised about the interest rate on the “clawbacks.”

    Here are some excerpts of their exchanges.

    Hill to Lennox: “What did you know and when did you know it?”

    Lennox responded by recounting the development of what attorneys called the “plain language statement” that was include with pensioners’ ballots. “We reached stipulation with the Retirees Committee,” Lennox said. “In that stipulation that was filed with the court on June 4th, we did specifically include that interest percentage because people had been asking about it. It was also in a letter dated June 4th that went out to retirees who were affected by the correction and the recoupment.”

    Hill: “You said it was not exact. Nowhere in those documents did it tell you there was a 6.75 percent interest tacked on to the ASF recoupment amount so it was not exact. That’s one of the reasons I’m standing here. It was not exact. … That plain language document was, in my view, the ideal document for you to spell everything out, the 6.75 percent. The ‘other factor’ phrase should have fallen by the wayside. … Since it was a plain language document, it should have been plainly explained to us what the clawback was. I think that has a lot of retirees, including myself, all up in arms because you’re taking money away from us but you’re not giving us the right to know what is all the money going for?  … I stil say that “other factors” was used as a ruse to allow you to come back at some other time to say, ‘oh, that was easy. Let’s try to get that money from them on “other factors.” ‘ “

    Hill: “Who came up with the word phrase ‘other factors?’ Who’s responsible for that?”

    Lennox: “The language that was included in all of the documents that you received was drafted initially by the city but it was heavily, heavily reviewed and edited by many, many people who represent the retirees such as the Retirement Systems counsel, the Retirees Committee counsel. We had counsel for the two largest retirees associations in the city that reviewed and comment on that. We also had counsel for the public safety unions, for AFSCME and for the UAW … I would say that those word phrases were the combination for very, very many people who were trying to make things clear and simple for the retirees.

    Hill: “So you don’t know who came up with the word phrase “other factors” therefore you don’t know what “other factors” entails?”

    Lennox: “No ma’am. I said that working was … a very collaborative process to put that language you refer to in those document. I think many people had a hand in that.”

    9:45 a.m.

    The first pro se objector was Wanda Jan Hill, who criticized the lack of communication between the city and retirees about the 6.75 percent interest attached to the recoupment of some annuity savings fund monies.

    Hill wanted to question Heather Lennox, a Jones Day attorney working for the city. City attorneys objected, and Judge Steven Rhodes first had her question Emergency Manager Kevyn Orr.

    Here are excerpts of that exchange.

    Hill: “My motion was relevant to the nondisclosure of the 6.75 percent (interest rate attached to the “clawback” of Annuity Funds from some general service retirees). I don’t know how much of the workings you were involved with that information not being disclosed, but can you explain to me and the court how much involvement did you have with the 6.75 percent interest not being provided in the relevant documents that Class 11 in particular needed in order to make a sound decision?”

    Orr: “I was involved in that process.”

    Hill: “To what extent, relevant to it being a nondisclosure issue?”

    Orr: “I don’t want to mislead you. I don’t look at it as a nondisclosure issue. Without getting into the discussions that occurred between counsel, between the retirement committee (during) the mediation process in terms of getting to that number. I think what I can say is there was no affirmative decision made not to include it in the Disclosure Statement. The concept was there was going to be communication with the Retirees Committee, which we asked this court to empanel, so there would be a conduit of information going back and forth to retirees. My understanding is that information was provided in at least one slide deck that the committee put out to retirees. There were a number of other fliers and communications that went out to retirees prior to the deadline for voting … In addition, I understand there were special discussions with members of that committee as well as members of other groups to try and explain that process. I don’t think there was an intent necessarily not to include it in the Disclosure Statement.”

    Hill: “I beg to differ. In my research I found that the phrase “other factors” was used instead of being forthright and putting all the cards on the table therefor that gave me the impression that it’s something that you don’t want us to know. So when “other factors” was used in at least 10 different documents, it raised a red flag.”

    Then Hill presented a chart of various documents the city filed in the case. She highlighted when the phrase “other factors” was used and when the 6.75 interest rate was specifically mentioned.

    “It was under the guise of ‘other factors,’” she said. “The 6.75 percent interest was a very important number. … this report shows the research that I did relative to life expectancy and ‘other factors.’ …. Every time it was mentioned in a document, this was the phrase that was used. “

    Hill: There was enough space and enough room to break down “other factors” I have a real problem with the fact that ”other factors” was not explained.

    She directed Orr to the April 17 document that corrected how voting by pensioners on the Plan of Adjustment would occur.

    “You can let me know: was the information relevant to the clawback and the ASF … was that known at that time? Did you know you were going to do the clawback?” she asked Orr.

    He replied, “Ma’am. Sitting here right now, I can’t recall. I’d have to look at my notes.”

    Hill: “I’m going to assume you had some idea of what you were going to take from the retirees.”

    Orr: “There were general discussions that I think are covered by the mediation order (preventing public discussion about them), but I think it’s fair to say around that time there were discussions going back and forth.

    Hill: “So the money was an issue at that time.”

    Orr: “I believe there were discussions being had.”

    Hill: There was enough space and enough room to break down “other factors” I have a real problem with the fact that ”other factors” was not explained.

    She directed Orr to the April 17 document that corrected how voting by pensioners on the Plan of Adjustment would occur.

    “You can let me know: was the information relevant to the clawback and the ASF … was that known at that time? Did you know you were going to do the clawback?” she asked Orr.

    He replied, “Ma’am. Sitting here right now, I can’t recall. I’d have to look at my notes.”

    Hill: “I’m going to assume you had some idea of what you were going to take from the retirees.”

    Orr: “There were general discussions that I think are covered by the mediation order (preventing public discussion about them), but I think it’s fair to say around that time there were discussions going back and forth.

    Hill: “So the money was an issue at that time.”

    Orr: “I believe there were discussions being had.”

    Hill: “I think so too because the media talked a lot about what they were going to take from us. … There was an idea of how much money was going to be needed. … By the time we got to Plan of Adjustment Three, you knew that other factors were going to be an issue. I don’t think you would have included ‘other factors’ if you didn’t think it was going to be an issue.”

    Then the judge interrupted.

    “I think what Miss Hill is trying to get to here is whether any of the city’s filed documents specifically disclosed that there was a 6.75 interest rate associated with the ASF recoupment or clawback,” Rhodes explained to Orr.

    Orr: “What I recall, your Honor, is I don’t think it was include with th Disclosure Statement. … There were other documents included on the city’s website. I don’t know if the fliers” and other information provided to retirees included the number.

    “In the circumstances, I think we have to have Miss Lennox testify to the extent to which she can fill in what Mr. Orr doesn’t know.”

  • Q: Who are bankruptcy’s Pro Se Objectors? A: Real people

    As part of the bankruptcy trial, Judge Steven Rhodes is including a handful of individual objectors – people who don’t have attorneys – called “pro se” objectors.

    One of them already questioned Emergency Manager Kevyn Orr and then testified herself. But most of them are expected to begin testifying Wednesday and will cover a variety of topics including: the “clawback” of the annuity savings fund; the voting procedure by various creditor classes (including pensioners) on the Plan of Adjustment; interest rates being used to calculate investment returns.

    Last summer, Rhodes invited 80 individuals to testify about their objections. Here’s a report of that day in court. Some of those are returning during the trial phase. We spoke with Gloria Williams and Steven Wojtowicz in advance of their testimony about their objections and what they’re expecting in court.

    We also interviewed Laura Bartell, professor of law at Wayne State University, about the inclusion of these individuals in the bankruptcy proceeding. She says it’s “not normal.”

    Here’s a transcript of that conversation:

    Sandra Svoboda: Why is the judge including these pro se objectors in the trial?

    Laura Bartell: An objector doesn’t lose the right to object merely because he or she does not have counsel. So if an objector has something relevant to bring before the court, the objector should have an opportunity to stand up in court and make his or her point.

    SS: What role do these objectors play in the bankruptcy trial?

    LB: These particular objectors do not have any dramatic points to make. Most of them are asking for an opportunity to question witnesses about the treatment of their pension claims, about the clawbacks, that sort of thing. We’ve already had one pro se litigant cross examine one of the city’s witnesses on feasibility but they have minor issues about whether the plan is fair and equitable, whether it’s feasible and the judge is going to allow them to question witnesses or present witnesses as they wish to make their points on those issues.

    SS: Is this a normal part of bankruptcy procedure?

    LB: It’s not normal to have pro se objectors. It’s only an unusual situation where you would have individuals not represented by counsel who were objecting to a plan either in Chapter 9 or in Chapter 11.

    SS: Does Judge Rhodes allowing these objectors shed any insight into his thoughts and his handling of this bankruptcy case?

    LB: This is consistent with his solicitude for the individuals who are being affected by the bankruptcy case. He wants to give them every opportunity to make their points publicly because part of that is an emotional resolution. If you can have the sense that you have made your point, it has been heard by the authority figure, that is Judge Rhodes, then even if he overrules your objection you at least feel you’ve gotten a fair shake.

  • A Retiree’s View of Bankruptcy: Previewing her testimony in court

    Retiree Gloria Williams is the former director of elections for the city of Detroit, where she also was a manager of computer applications. She filed this objection and is scheduled to testify during the confirmation hearing. She spoke with Sandra Svoboda, bankruptcy reporter and blogger for WDET and Next Chapter Detroit. Here’s that interview, with a transcript below.

    Sandra Svoboda: Why did you file an objection in the bankruptcy case?

    Gloria Williams: Because of the inconsistencies in the way the balloting took place. First they sent us two ballots. Then they said they made a mistake and they sent us more ballots and it wasn’t clear as to which ballots should be returned, what was going to happen if you’d already returned your ballot and then you send your new ballot in. It wasn’t really clear as to what was going to happen to all of those ballots. Why I was really concerned was there wasn’t an accounting in the final documents as to what happened to the ballots and there’s no audit of the balloting process.

    SS: You’re referring to of course, the voting on the Plan of Adjustment that was done by the different classes of creditors, yours being the retirees or pensioners.

    GW: Correct. You have to understand that there are thousands of retirees who are out there who are in their 70s, 80s, 90s who would be totally confused with how the balloting took place.

    SS: Did you raise these concerns before or during the voting process?

    GW: Well, I wasn’t concerned until the results came back and I read through the results and didn’t see where they accounted for those ballots. They didn’t say how many they had received that were invalid, how many were duplicates and those ballots were never accounted for plus in every election, I don’t care what kind of election it is, that election is supposed to be audited by some independent agency and it wasn’t.

    SS: Have you received notice as to when you’ll be testifying during the confirmation process? What are you anticipating that will be like?

    GW: They did send me documentation and they said I would have to interview the balloting company over the phone because they weren’t coming. (laughs) And I thought that was disrespectful if nothing else.

    SS: What do you plan on telling the judge about your objection?

    GW: I really don’t want to reveal that right now because I don’t want them to be prepared for the answer. (laughs) So I would rather do that when I get to court, that way they will, you know, won’t have time to research and find this case and that case against what I’m proposing. It’s just that after there were so many questions about the balloting process, they should have volunteered to have someone else, some other company review what they did just to validate their process.. So I thought that was odd that they didn’t do that.

  • From a Pro Se Objector: A preview of bankruptcy case testimony

    Steven Wojtowicz retired from the Detroit Water and Sewerage Department after 31 years of work. He’s one of the “pro se” or individual objectors Judge Steven Rhodes is allowing to testify or question witnesses as part of the city’s bankruptcy trial.

    In advance of this testimony this week, he spoke with WDET/Next Chapter Detroit’s Sandra Svoboda. Here’s the document he filed with the court requesting time during the trial.

    Here’s a transcript of that conversation:

    Sandra Svoboda: Why file an objection in the bankruptcy case?

    SW: My original objection was that obviously I thought the recoupment was unfair, the ASF recoupment was unfair but adding on the interest rate wasn’t in the documentations and during the negotiations for the pensions the 6.75 percent was never brought up. It wasn’t brought out, up until the ballots were sent out that people, some people knew about the 6.75 percent if they attended the presentations or received the revised ballot or talked to someone about the 6.75 percent. That was my biggest objection that you know adding on that interest doubles the recoupment amount.

    SS: What have you seen as some of the big issues in the trial so far?

    SW: It seems like they’re just interviewing people I don’t see any big changes other than doing some negotiations with some of the banks and some of the insurance companies. I don’t see much changing I guess for the bankruptcy. Everything just seems to be what it is is going to be what it is, what they decided before the confirmation hearing. I’m not sure if Rhodes is going to bring up anything about our annuity and the interest rate. I’m not sure. I haven’t heard anything positive about that.

    SS: What are you anticipating your testimony will be like?

    SW: In the docket that they came out with response to my objection, a couple of things that they mentioned now here, one things, the 6.75 percent what they said is they clarified the 6.75 percent and added it into the bankruptcy documents but my other questions was the recoupment with interest never ends. It’s a lifetime annuity. But they responded back in that latest docket that no, this ends after you pay back your recoupment. It stops. But in the ballot and in their presentation it says that this goes on for a lifetime. I asked to get a clarification of that. That’s going to be one of my questions.

    SS: Do you feel like your testimony made that change happen?

    SW: I think so because that’s the only place I see it is in their response to my objection. So I would think so. I get a clarification like again, I can’t find it in the bankruptcy documents but it’s in that one docket from the attorneys from the city. So I’ve got to get a clarification on that.

  • Day 18: Detroit’s Bankruptcy Trial

    The confirmation hearing for the city’s Plan of Adjustment is continuing, and after an early morning glitch, we now have sound in the media room. Witnesses for bond insurer Financial Guaranty Insurance Company (FGIC) and holders of pension debt are scheduled today.

    Before the hearing started, attorneys for FGIC told Judge Steven Rhodes they expect to announce a settlement this week. “Pro Se” objectors, people without attorneys, are scheduled for tomorrow.

    The first witness is William Fornia, a pension consultant.

    I’ll be back with more from court later this afternoon. I’ve got to go fundraise on air on WDET, 101.9 FM or stream it from It’s our Pledge Week where we welcome new members and thank our sustaining friends!

    11:21 a.m.

    During the second half of the morning court session, Fornia was questioned by city attorney Evan Miller, who challenged some of his projections. Fornia also took questions, largely about procedures for calculations of pension costs, from Claude Montgomery, who represents the Official Committee of Retirees. The committee is supporting the Plan of Adjustment.

    9:56 a.m.

    Of Detroit’s 21,390 current retirees, about a third live in Detroit, Fornia said.

    The actual numbers, from his testimony:

    7,450 Detroit retirees are city residents.

    13,940 live elsewhere.

    9:50 a.m.

    After more than two dozen witnesses called by the city to support the Plan of Adjustment, creditors are now making their own arguments, challenging provisions in the plan. Chief among them: the amount the city projects it will need to pay for its two pension funds: The Police and Fire Retirement System and the General Retirement System.

    The Plan of Adjustment uses a 6.75 percent interest rate for future investments by the funds. Today’s first witness, William Fornia, spent some time challenging that number. Fornia’s firm, Pension Trustee Advisors, is located in Centennial, Colorado.

    He called the 6.75 percent “excessively low.” The city’s witnesses called it “conservative.”

    “By being so low, it causes the claim to be higher. The pensions funds have earned their assumed rate of return over the last 25 years,” Fornia said. “It seems inconsistent they’re using rates as low as 6.75, it’s certainly inconsistent with common practice.”

    He’s being questioned by attorney Jonathan Wagner, who represents holders of the Certificates of Participation from the now-controversial 2005 pension funding deal.


  • The Detroit Bankruptcy Attorneys: For the city and creditors

    Where the bankruptcy attorneys are from:

    Bankruptcy takes a lot of attorneys, that much is clear.

    Following is more information about the lawyers who have appeared during the city’s bankruptcy trial, along with links to their online bios, and their clients (the city or a creditor).

    We also pulled together the location of their home offices – above is the map of the states where they are, below is some detail of firm locations in Michigan and New York City, where we find the highest concentrations.

    (The city’s Jones Day team has five trial attorneys from the District of Columbia’s office, where Detroit Emergency Manager Kevyn Orr used to work.)

    Here’s a detail of the firms in metro Detroit:

    And here’s a detail of the firms in New York City:

  • Day 17: Detroit’s Bankruptcy Trial

    The city’s creditors who are objecting to the bankruptcy restructuring plan are now presenting witnesses, starting with Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System. Earlier today, Detroit City Council President Brenda Jones and Mayor Mike Duggan were on the stand as the city wrapped up its presentation of witnesses in the bankruptcy trial. We’ll have updates throughout the day.

    4:07 p.m.

    The trial is adjourned until Tuesday, Oct. 14. Judge Rhodes thinks closing arguments will come the week of Oct. 20.

    4:04 p.m.

    At the end of Thomas’s testimony, Judge Steven Rhodes asked her some questions. Here’s part of their exchange:

    Judge: Why do we have an unfunded liability in the city of Detroit for its two pensions?

    Thomas: I believe the biggest contributing factor was in 2008, the crisis, the tremendous losses we suffered on our investments. We have an aging workforce. We’re called a mature plan where the retirees are like twice as many as the active employees so you have less contributions coming in and more benefits coming out.

    Judge: Is it fair to say that in the years of that recession, whatever they were, the actual returns were less and in some significantly less than the assumed rate of return.

    Yes, that’s fair.

    Judge: Is it also fair to say that it’s the city who bears the risk and the responsibility when that happens?

    Thomas: That’s a fair statement.


    Judge: If the assumed rate of return is lower, like 6.75 percent compared to 7.9 percent, is the city’s risk that it will incur unfunded liability lower or higher, all other things being equal.

    Thomas: The city’s risk is higher.

    Judge: Explain that to me I thought it was the opposite.

    Thomas: If the assumed rate of return then the city’s risk of having to contribute more is higher.

    Judge: Based on your experience with these two pension plans, do you feel you are qualified to judge the reasonableness of the rates of return of a pension plan.

    Thomas: No.

    3:43 p.m.

    The last time the Detroit pension boards changed the asset allocations of the roughly $6 billion they oversee was in 2013, Thomas testified.

    “There will be no changes until the plan is actually confirmed. There have been some discussions with the investment consultants taking into consider the changes the POA will bring but they aren’t going to make any changes prior to that. To do it efficiently you really have to plan to transfer assets of that size,” Thomas said.

    The pension boards are supporting the Plan of Adjustment because of a settlement reached with the city in April.

    3:37 p.m.

    Individual objector Michael Karwoski is questioning Thomas. He filed this objection and 98 people filed joinders. His questions are covering pension fund governance, investment interest rate assumptions and the annuity savings fund recoupment.

    2:28 p.m.

    The city’s pension funds since March 2013 has used a 7.9 percent interest rate in forecasting returns on investments. “It’s a rate that was set with information from our actuary, asset consultant, our attorney, restructuring counsel, trustees,” Thomas said.

    The city’s Plan of Adjustment uses 6.75 percent, and attorneys for financial creditors are arguing for using a higher rate. The higher rate would mean the pension systems are better funded, based on the projections, and should translate to fewer city financial obligations and lower cuts to other creditors, their attorneys say.

    The 6.75 percent figure was reached during mediation and was proposed by the city’s actuarial firm, Milliman. (The pension systems and the Official Committee of Retirees, the court-mandated group, also have actuarial firms.)

    Thomas testified that Milliman has not asked her any questions about the system. She was asked about certain procedures as part of the bankruptcy process. The city set up a Pension Task Force but did not tell her about it nor ask Thomas or any staff to join the group, according to her testimony.

    Thomas was asked about this interview during her time on the witness stand.

    1:54 p.m.

    The city is done making its case, and the “objectors” have called their first witness: Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System.


    After creditors and city attorneys questioned Duggan, Judge Steven Rhodes had his turn. He asked about the proposal for up to $325 million in exit financing that’s in the Plan of Adjustment and he must decide whether to approve.

    Here’s a portion of their exchange:

    Judge Rhodes: A substantial portion of that borrowing is for purposes of paying the obligations to creditors under the Plan, You understand that.

    Duggan: I do.

    Judge Rhodes: There is however a piece of that that’s not for that purpose, it’s for other purpose in relations to city operation and these restructuring initiatives. … My question is what is your judgment on the need for that financing for these purposes in this second group, the city operation purpose and the reinvestment purposes?

    Duggan: Your Honor, I’m probably going to get myself in trouble with the people I have to go back to the office with. I had extensive conversations with (court expert Richard) Ravitch about this and extensive conversations with (city CFO) John Hill about this, and I believe we need to keep the exit financing to the lowest possible amount. One of the troubling things we have seen is a $50 million overrun in consultant fees. I don’t think it’s a coincidence we’re going to get up to $50 million in the exit financing and the amount we’re seeing, $50 million in consultants’ fees. I’d be very disturbed if we had to borrow $50 million in consultant fees because the consultants didn’t stay on budget. John Hill thought $275 million was reasonable.

    Judge Rhodes: It was explained to me that the reason for the increase was the settlement with the limited tax general obligation bond creditors that involved a cash payment to them of approximately this amount. Do you know anything about that?

    Duggan: That’s the first I’m hearing about it.

    Judge Rhodes: Am I right? That’s what was explained to me?

    Thomas Cullen (a Jones Day attorney working for the city): Yes, your Honor, it was explained that was part of it, the decision to retire that note.

    Judge: Well, I don’t want to put you on the spot and if you’re not able to answer this question, that’s fine with me. But if that’s the purpose of this additional borrowing is to fulfill a settlement obligation, is that something you could support?

    Duggan: Your Honor, you’re beyond my expertise on that. I would defer to John Hill whether that extra $50 million is needed or not. I know philosophically he believed as do I that we should keep this borrowing as low as we can.

    11:35 a.m.

    Here are the last updates from Duggan’s testimony under questioning by city attorneys:

    On the inclusion of the Financial Review Commission in the grand bargain legislation:

    “There was no way the grand bargain legislation was going to pass without a financial review commission,” Duggan said.

    On what he sees as the risks of the Plan of Adjustment and the restructuring initiatives:

    “For the most part, I worry about things that are outside of our control,” Duggan said. Those include suburban casinos that would cause a decrease in the city’s annual $170 million it collects in taxes from the three downtown casinos and a decrease in state revenue sharing dollars. The plan projects a steady rate of that money.

    “It’s going to be really hard work to make sure that happens but those are things that I signed up for and I’m going to work really hard at them every day,” Duggan said.

    11:23 a.m.

    Here are a few more highlights of Duggan’s testimony.

    On the proposal from financial creditors to sell Detroit Institute of Arts assets to raise funds:

    “There’s a feeling of hope in the city. … To take the art institute out, it’s such a centerpiece of the city I think it would be a huge negative for our image. I think it would be a huge negative for people’s decisions and I think it would plunge the city into the kind of anger and turmoil that we’re trying to get away from.

    On the possibility of raising taxes in the city:

    “There’s no more inefficient way in the city of Detroit to collect tax revenue than in the property tax,” Duggan said.

    In addition, he said, there isn’t much money to be gained as one mill of property tax raises only $7 million.

    On negotiations in the bankruptcy case:

    Duggan was involved in the mediations regarding the Syncora settlement and the creation of the regional water authority.

    “With the exception of those, I’ve had very little involvement in the other settlements,” Duggan said.

    11:12 a.m.

    City attorney Thomas Cullen, of the Jones Day firm, questioned Duggan during the direct examination portion of the mayor’s testimony. Cullen asked Duggan to give a summary of his opinion on the Plan of Adjustment. Here’s what Duggan said:

    “I support this plan and I believe it is feasible. I can’t predict a national recession. I can’t predict state revenue sharing cuts. I can’t predict casinos being approved but those are the risks I signed up for as the mayor. But I believe in this plan there are resources to be successful if we’re aggressive, we work hard and we don’t have any serious misfortune that’s outside of our control.”

    10:55 a.m.

    Despite the many improvements made during his tenure, city services aren’t at the optimal level, Duggan testified.

    “We’re probably about 10 percent of where we need to be,” he said. “There’s a lot but we’re building gin the right order. It’s going to be a multi-year process before people get the kind of services they deserve.”

    10:39 a.m.

    Here are a few more highlights from Duggan’s testimony:

    On transit: “If Detroiters are going to have opportunity to go to work and school, we’ve got to have transit,” Duggan said. “Three quarter of the buses are approaching the age of retirement.” A federal grant, announced last month, will provide $26 million for Detroit Department of Transportation improvements. “The city is hiring more drivers and will hire more transit police officers,” he said. “We’re are going to put out a schedule that we are going to honor.”

    On the roughly 275 parks the city owns: “In 2013, the city maintained 25 of them on a regular basis,” he said. Today, that number is 180. “It was good but it wasn’t enough,” he testified, so Duggan reached out to churches and businesses, and they adopted 75 parks. The groups mow the parks every 10 to 14 days and pick up trash three times a week.

    He said that effort is part of a new philosophy beginning to emerge in Detroit: partnering with city government, “not expecting city government to deliver all services.”

    On the 100,000 vacant lots: Some had not had grass cut since 2010, which Duggan called demoralizing. “If you’ve got a neighborhood with a few vacant lots, usually the neighborhood will pitch in and cut it,” Duggan said. But when there are several, it becomes overwhelming. Duggan said the city started mowing this year.

    “We cut them all once and now we’re halfway through the second cut,” he said. “If you drive through the city today the vacant lots are in far better shape than they were a year ago. These kinds of things are significant factors in people’s decisions about whether they’re going to stay.”

    10:25 a.m.

    Duggan testified that the negotiations for the recently ratified collective bargaining agreement with the Detroit Police Officers Association demonstrate how the Plan of Adjustment will guide the city’s operation.

    He said he talked to Emergency Manager Kevyn Orr about changes he wanted to make in the police department. “He said, ‘if you can work out a deal within the dollars of the Plan of Adjustment, go ahead,’” Duggan testified.

    The deal, announced last week, includes a base pay raise of 8 percent. Duggan said money was available because of reductions in sick days from 17 to 12, the elimination of the retention bonus and the replacement of uniformed officers in traffic, prisoner transport and crime statistics positions with retired officers who would not need benefits.

    It was ratified 80-20, Duggan said. “The officers now know they’ve got an immediate 8 percent pay increase and we’ve got the ability to bring back retired officers to paid position ad you’re going to see us be able to effectuate the Plan of Adjustment by putting more officers back on the street,” Duggan said.

    10:14 a.m.

    A few highlights of Duggan’s testimony so far:

    “One person doesn’t do a turnaround. You need to recruit a strong and deep team in order to deliver services to the public … You’ve got to plan two or three years ahead because you never know what’ coming up in the state of Michigan economically.”

    After he was Wayne County Prosecutor, Duggan became head of the Detroit Medical Center, which was in dire financial straits. “When I came in, we have 15 days cash on hand,” Duggan said. “The bankruptcy attorneys had already been hired.”

    Like Detroit, the DMC had problems with service delivery and leadership turnover. “We really had to rebuild the team from scratch,” Duggan said.

    Gov. Rick Snyder approached him about being the emergency manager of Detroit. “I told them I didn’t agree with the principle of an emergency manager and I wouldn’t be interested, but I started to think what’s the alternative,” he said. So in late 2011, he said to his wife, “Let’s move back to the city. Let’s see what happens.”

    His tenure at the Detroit Medical Center was “the most powerful” of his life, Duggan testified. “If there’s any place in the country where we’re getting past the racial divisions, it’s in an urban emergency room,” Duggan said. “I started to think it could be possible that we could break across the barriers in other parts off the city. I really felt like if I could meet everybody in the city we could get past those racial divisions.”

    9:48 a.m.

    Mayor Mike Duggan is on the witness stand.

    Also, before she left the witness stand, Jones pointed out  City Council Members Scott Benson and George Cushingberry have joined Saunteel JenkinsAndre SpiveyGabe Leland in the audience.

    9:47 a.m.

    Judge Steven Rhodes had his own questions for Jones.

    Judge: As you know, the plan does not provide for a public sale of the art at the Detroit Institute of Arts. Do you have a position whether the art at the Detroit Institute of Arts should be sold to pay creditors of the city.

    Jones: My position is per the city charter, the city should provide art and culture to the citizens of the City of Detroit and the art, protecting the art and the DIA is helping to follow the city charter of the city of Detroit.

    Judge: What is your understanding of why the city charter has that provision in it?

    Jones: Because the citizes of Detroit need culture and art provided to them. The citizens cry all the time about the taxes they are paying. The need something just outside of paying taxes as cultivation of the city.

    9:43 a.m.

    After city attorney Greg Shumaker finished about 30 minutes of questioning, Jonathan Wagner cross examined Jones. He’s an attorney for the holders of the Certificates of Participation (COPs), the controversial pension funding deal. He asked about the funding level of the Police and Fire Retirement System, where Jones is a trustee. The system issued a statement in March 2013, saying the plan was 96 percent funded. Today that figure is 89 percent.

    Attorney Ed McCarthy also questioned Jones. He’s an attorney for Financial Guaranty Insurance Company, which has a roughly $1.1 billion claim in the case as the insurer of the COPs. He asked about the $1.7 billion in the city’s Plan of Adjustment for city services, known as the Restructuring and Reinvestment Initiatives (RRI). “The city council and the mayor to the best of their ability will implement the allocation of the money that is in the RRI,” she said. Through his questions, McCarthy pointed out the City Council had not reviewed the value of the Detroit Institute of Arts collection, the economic value of the museum to the city, the number of annual visitors it has and other subjects before the council voted to transfer the DIA assets to a nonprofit, as part of the Grand Bargain.

    After McCarthy, Debra O’Gorman questioned Jones. O’Gorman represents the Macomb County Public Works Commissioner Anthony Marrocco, who has a $26 million claim against the city related to a pending lawsuit over the Macomb Interceptor Drain Drainage District.

    9:15 a.m.

    Here are some highlights of Jones’s testimony.

    On pensions being cut as part of the bankruptcy settlement:

    “When you work a job and you look forward to retiring, you look forward to the dollars that you will have to care for yourself and your family, to know that your pensions will be drastically cut and the money you expected to receive you will not be receiving, that definitely has an effect on you.”

    On the Financial Review Commission:

    “They will make sure the council and the mayor are doing what we should do to make sure we stay on track. … I was not at first in favor of it. There were some concerns on council of not having a role or not having a seat on the financial review commission and there were concerns about the amount of work council would be doing with them.”

    On the original structure of the Financial Review Commission (which did not include a member appointed by the Detroit City Council, as it does now): “All nine council members went up to Lansing and talk to the legislators as well as to testify that we felt council should have a seat on the financial review board,” Jones said. “Having someone look at the work we do and approve it for 20 years. We felt that if we could show we could do our job,… then the oversight commission should go dormant and not come in unless we can’t do our job which we felt we could.”

    On how council and the mayor will work together post-bankruptcy:

    “We will continue to collaborate and talk about the things the city needs to have adequate services. I’m sure he will collaborate with my colleagues to make sure we have no deficit and to make sure the budget is met.”

    On how bankruptcy will change Detroit:

    “I’ve been on council for nine years. I’ve watched the city fight to see do we pay Peter or do we pay Paul. Now we’ll be able to know who we’re paying and be able to have the money to pay them and be able to give the citizen services they deserve to have as a tax-paying citizen of the city.”

    8:58 a.m.

    Jones answered questions about whether she agreed with the bankruptcy filing. “I felt the bankruptcy could have been done by the city themselves rather than have an emergency manager there,” she said, adding she eventually changed her mind. “As we have progressed through the stage, and I have seen the progression that has taken place, I’m happy with the progression and the level of services the citizens are seeing. I think it’s helping to improve the city,” Jones said.

    City services are a popular conversation topic in Jones’s life. “I cannot go into a grocery store to go shopping, I cannot shop without a resident telling me about the level of services they have in the city of Detroit,” Jones said. “They are saying that the services are not adequate.”

    8:53 a.m.

    City attorney Greg Shumaker, of the Jones Day law firm, is questioning Jones, who is an at-large member of city council. City Council Members Saunteel Jenkins, Andre Spivey, Gabe Leland are in the audience.

    Jones says others will come after committee meetings. Jones says the mayor and the council have a good relationship. Shumaker asked her about the emergency manager. “I am happy to say Kevyn Orr and I have a good relationship, now,” Jones said, which was followed by courtroom laughter.

    Shumaker asked her if there was a time it was “less than good.” “I would not say it was less than good I would just say that we did not have a communication,” Jones said. She identified blight and public safety as the biggest problems facing Detroit, and said the city’s service delivery is “improving.”

  • Day 16: Detroit’s Bankruptcy Trial

    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.

    11:58 a.m.

    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.”

    11:43 a.m.

    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.

    11:35 a.m.

    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.”

    10:52 a.m.

    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.”

    10:45 a.m.

    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.

    10:15 a.m.

    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.

    10:04 a.m.

    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.”

    Here’s Ball’s motion to participate in the trial.

    9:44 a.m.

    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.

    9:39 a.m.

    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.”

    9:23 a.m.

    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.

    9:20 a.m.

    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. …

    8:54 a.m.

    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.

  • Day 15: Detroit’s Bankruptcy Trial

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

    5:00 p.m.

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

    3:56 p.m.

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

    3:45 p.m.

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

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

    3:36 p.m.

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

    3:25 p.m.

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

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

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

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

    1:55 p.m.

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

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

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

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

    1:39 p.m.

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

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

    Shumaker asked what could be sold.

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

    11:55 a.m.

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

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

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

    11:35 a.m.

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

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

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

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

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

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

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

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

    10:36 a.m.

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

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

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

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

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

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

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

    10:04 a.m.

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

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

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

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

    9:55 a.m.

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

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

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

    9:44 a.m.

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

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

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

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

    9:35 a.m.

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

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

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

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

    Orr had not, choosing to protect the artwork.

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

    9:16 a.m.

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

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

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

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

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

    9:01 a.m.

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

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

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

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

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

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

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

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

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

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

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

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