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:
Bankruptcy Judge Steven Rhodes is holding an evidentiary hearing today to help him decide whether he should order a six-month halt to the water shutoffs in the city for people with unpaid bills with the Detroit Water and Sewerage Department. Ten individuals and a handful of welfare rights and legal advocacy groups have requested the moratorium.
City attorneys, in asking Rhodes to dismiss the request, say such an order from the bench would be unprecedented in a bankruptcy case as it interferes with the daily operations of the water department. They also object to a blanket ban on shutoffs because some water hook ups are illegal.
Here’s some background on the issue and an explanation of how the issue reached the judge overseeing the city’s bankruptcy trial. Here’s what’s happening in the courtroom.
As the state chair of the Michigan Welfare Rights Organization, Maureen Taylor said she has visited hundreds of homes where there’s been no water. “It’s beyond sad. There are empty bottles of water, empty containers of water. It’s sad. People are scared. It’s a horrible thing to see,” she said.
Taylor was one of the witnesses for the group that’s asking Judge Rhodes to authorize a six-month postponement of shutoffs for residential water service customers with past due bills. Taylor said she doesn’t like Mayor Mike Duggan’s 10-point plan to assist Detroit residents who are having trouble paying their water bills.
“If you miss one payment, there’s a larger amount of money you have to come forward with and it does not relate to any households who had service cut off and they restored it without permission,” Taylor said during her testimony. “We begged the city of Detroit to let us draft a payment program because we really know how to do it. My organization has been involved with water disputes for over a decade.”
Hydration, hygiene, sanitation are the three functions of water, said John Armelagos, who works as a nurse at the University of Michigan Health System and is the president of the Michigan Nurses Association. He testified for the group requesting the six-month postponement of any shutoffs to Detroit’s water customers who have past due bills.
Like Gaines earlier (see below), Armelagos detailed some of the individual and community health effects of living without water: greater vulnerability to hepatitis A and other diseases, head lice, scabies.
But under cross examination by a city attorney, Gaines admitted he was not aware of any increase in communicable diseases in Detroit in the last two years while the shutoffs have increased.
George Gaines was the city’s deputy director of health during Mayor Coleman Young’s tenure. Gaines, who has master’s degree in public health, testified about how the water shutoffs could lead to the spread of hepatitis, salmonella, or giardia.
“When water is shut off, that means you do not have a toilet that you can flush which means you have to get some provisions to safely get rid of human waste. That also means you don’t have any water to wash your hands and you begin to think immediately about what are the diseases that would result from an unsanitary way of defecating,” Gaines said.
He repeatedly called it a “campaign” to shut off water to residencies.
“When you start talking about thousands of people without the ability to flush their toilets or wash their hands, I think you put the community at risk of communicable diseases that are passed fecal or oral and can get into the water and into the food that people consume,” Gaines said.
Stopping water service because people can not afford to pay their bills only makes problems worse citywide, according to Roger Colton, a public utilities expert testifying for a coalition of individuals, welfare rights groups and lawyers who want to stop the shutoffs to customers with past due bills. Colton says Mayor Mike Duggan’s new 10-point plan to help people pay water bills won’t work because it won’t help people catch up once they get behind because it increases the amount customers owe if they miss a payment.Instead, Colton recommends low-income residents be allowed to set aside a percentage of their income for their current and future bills. But on cross examination, city attorney Sonal Mithani asked Colton if he knew such a plan would be illegal under Michigan law. He said he did not.
But Detroit’s water and sewerage department director, Sue McCormick, says the city can’t afford to ignore payments for service. She says the department needs the funds to operate and to maintain its bond rating so it can borrow money for infrastructure improvements. DWSD director Sue McCormick testified that the number of shutoffs this year has totaled about 20,000 and last year was 24,000. Under questioning by Alice Jennings, an attorney for the plaintiffs, McCormick said she didn’t know how many of the dwellings were vacant or had children or people with disabilities living in them. As of July 31, the city had $86 million in overdue water and sewerage bills. About $42 million of that was for residential services. McCormick is paid $190,000 annually.
The first witness was Tracy Peasant, who lives near Marygrove College. She said a large portion of her outstanding bill was due to a faulty sprinkler system at a home she had rented prior to living at her current place. Her water was turned off a year ago and restored in June.
“Someone came out to my home driving a DWSD truck. I thought that she was coming to turn the water back on. … She said I’m here to make sure your water is still cut off,” Peasant testified. But when the worker saw Peasant’s family members, “She said I can’t do this with these kids and when she left she said you have water now,” Peasant said. The second witness was Maurikia Lyda, who is one of the 10 plaintiffs seeking a halt to the shutoffs. She testified that she tried to talk to someone at DWSD and get into a payment plan for her bill that had topped $1,000. “I called them several times. I could never get through. I was calling and no one would ever pick up the phone. There were days I would call and stay on the phone two and three hours at a time,” Lyda said. “When I finally got to talk to someone about my bill they was telling me there was so much I had to put down. … I didn’t want to put it in my name because I was a renter. … they was telling me I had to put it in my name.” Lyda, who lives on the east side, said a DWSD representative told her it would cost $100 to transfer the water service to her name and $500 to have service restored. But the day the lawsuit was filed, her water was restored.
The day began with Michael Plummer’s return to the witness stand. The founder of Artvest, Plummer authored a study assessing the value of the entire collection at the Detroit Institute of Arts. Here’s some of what he had to say yesterday. He was followed by Annmarie Erickson, the chief operating officer of the Detroit Institute of Arts, and John Satter, a real estate appraiser who valued the museum’s physical property.
Judge Steven Rhodes interrupted Allan Brilliant, who represents the Macomb Interceptor Drain Drainage District, while he was questioning a real estate expert about what the Detroit Institute of Arts building and land are worth.
Rhodes asked Brilliant what HE thought the property is worth.
$200 million, Brilliant said.
Other information from the testimony of John Satter, the Midwest region managing director at Hilco Real Estate Appraisal:
The DIA sits on 14 acres. The property is worth $500,000 an acre. So Satter concluded the property alone is worth $7 million.
The fair market value of the property and the building is about $43 million.
But that is if it was sold to someone who wanted the property for an “institutional use.” Satter also appraised the property as if it was sold to an investor who would need to make substantial changes to the site.
In that case, Satter estimated the sale price at $18.5 million.
But Jones Day attorney Geoff Irwin, working for the city, asked about taxes the DIA property and building would generate if purchased by an investor for commercial purposes. Satter said it could generate $1.5 million annually in taxes.
But he also cautioned about its marketability to investors.
“It’s a beautiful building. It’s got wide halls and nice spaces but it would be a real challenge to repurpose that. There’s a lot of question marks and some caution. It’s in a historic district, and what allowable uses remain would be answered by the city,” Satter said.
Under cross examining by Allan Brilliant, who represents the Macomb Interceptor Drain Drainage District, which has a $26 million claim in the case, Satter admitted he has done 6 real estate appraisals in Michigan.
One was in Detroit. It was of a fast-food restaurant.
The first – and possibly only – afternoon witness is John Satter, the Midwest region managing director at Hilco Real Estate Appraisal. He appraised the real estate holdings of the Detroit Institute of Arts for Jones Day law firm on behalf of the city.
His conclusion: “The market value of the property in question falls somewhere between $18,500,000 and $43,000,000, depending on the circumstances of the sale.”
At the end of Annmarie Erickson’s direct and cross examination by attorneys, Judge Steven Rhodes had some questions of his own. Here are a few of their exchanges.
Judge: What is your opinion on what the value of the museum is to the 60,000 school children who you said came there in the past year?
AE: I think the museum is of tremendous value to those children. It gives them an opportunity, first of all, to get out of the classroom and do something different and learn something different and look at the world in a different lens than they might in their classroom. …. I think that’s really valuable and if I could tell you a small anecdote: last spring when we were very full of schoolchildren, there were two little boys walking together. One of them looked at the other and said, ‘This is way cooler than I thought it would be.’ I think that kind of thing happens every day in the museum.
Judge: What is the value to the children of participating in the programming that the museum offers apart from just the opportunity to see the art?
AE: The museum uses a teaching method called Visual Teaching Strategies (VTS) and all of our school tours are based on VTS. … What we find is that kids who go though VTS in the art museum begin to develop skills in terms of critical thinking, in terms of being able to articulate their thoughts better … and sometimes, if we do a writing program with them, improve their writing. We also have literally a thousand comments from teachers … that talk to us about happened with their students when they were at the museum. It really does sharpen their curiosity in ways that one wouldn’t necessarily expect.
Judge: Families go to the museum.
AE: They do.
Judge: What is the value to families when parents take school-age children to the museum?
AE: I think the museum is a great social place for people. They can come in. They can feel very comfortable and they can engage in ways with each other they certainly wouldn’t do in front of a television. I think it promotes conversations. … Parents can actually feel smart, and that’s an important concept. Because if a parent doesn’t feel smart, they’re not comfortable talking to their child. … We don’t want a silent art museum at the DIA. Our mission statement actually says that we create experiences that help people have personal experiences with art. … That’s what we believe art is about.
Judge: What is the value of going through the art museum for adults who go…? Why do adults go to the DIA?
AE: I think that adults go, and I can put myself among that because I do go to the museum and I go to other museums, I think that adults go as a reminder of possibilities. The museum reminds us all that we can be creative problem solves because in the end, that’s what artists do: they solve problems. So I think adults, although they may not identify it as that, they go for inspiration. Certainly they will tell you they go to be educated. … They go to be educated. They go to be inspired. They go to see something different. It takes them out of everyday life in a way that is satisfying.
Selling the art would not only decimate the museum collection, it would sacrifice the tri-county millage and donor gifts, according to DIA COO Annmarie Erickson who testified this morning.
“We have heard public statements from the county executives in Oakland and Macomb counties that they would stop millage payments if anything was sold. I have personally had conversations … that the millage would be stopped,” she said. “It would have a tremendously chilling effect on donors. … We can’t raise money while our future is in question. A sale of the art would be even worse. We would not longer get gifts or art because they would be subject to sale.”
Another effect: “We would be persona non grata in the museum world,” she said.
Erickson learned during the Spring 2013 that the city was considering the possible liquidation of the art collection to pay creditors. Museum executives made their opinions known.
“We affirmed that we hold the collection in trust for the public. We believe the city is a partner in holding that collection in trust and we would defend the collection as needed,” she said. “We made many public statements. It was reported in any number of media outlets. It was reported in our board minutes. We were very public about it.”
The Detroit Institute of Arts chief operating officer, Annmarie Erickson, is convinced the museum will meet its commitment in the “Grand Bargain.”
That’s the deal that has foundations contributing $366 million to Detroit’s pensions systems and the state providing $195 million. Among the conditions: The DIA raises $100 million and no artwork is sold.
“It’s not easy but we’re doing very well. We have approximately $85 million committed to that and we have multiple asks that are still out there. I am completely confident that we will do it,” Erickson said while testifying in the city’s bankruptcy case.
If there was to be a sale of the art, the museum would fight.
“We would be in litigation to protect the collection. We hold the collection in trust and we consider that to be an obligation we cannot shirk and if it means fighting legally for it, we would,” she said.
A few quotes from Annmarie Erickson, the chief operating officer of the Detroit Institute of Arts:
“The Rivera murals are probably what the museum is best known for,” Erickson said. “Rivera considered them to be one of his finest works of art, and we really consider them to be the heart of the museum. I don’t know that there is another piece that speaks so deeply to what a city is.”
“It’s the core of what we do: hold our collections in trust for the public. When the DIA was facing dire circumstances, we never considered selling our collection,” she said. “Everything we do is really for the public’s use of the museum.”
A few things she’s mentioned:
*The museum considers itself one of the top six in the country, and is the largest museum in Michigan. The DIA makes loans from its collection to smaller museums in the state and develop professional development seminars.
*There were about 610,000 museum visitors last year. “We are actually on track to do better than that this year,” she said.
*The DIA counts 30,000 members. “They’re absolutely critical to us,” she said. “They are our closest family.”
*About 700 volunteers are “active”, staffing the information desks, supporting security guards by walking through galleries, conducting public tours, dusting the art. “It is not an exaggeration to say we could not operate without our volunteers,” Erickson said.
*Full- and part-time employees number 300.
*The museum is conscious of the needs of Detroit, working with the veteran’s hospital, Children’s Hospital of Michigan, The Children’s Center, recovery programs and other social service providers and nonprofits. “By our very existence we provide benefits to the community,” she said, citing several educational, social service and professional programs.
*The InsideOut program temporarily installs high-quality reproductions of pieces in “unexpected places” in Detroit and suburban communities: parks, walls, alleys, “just places where you wouldn’t expect to see a beautifully framed piece of art.,” she said. “We’re now in our 5th year and we show no signs of slowing down.”
*The annual budget this fiscal year is $32 million. A tri-country property tax currently raises $22 million. “The other $10 million is fundraised,” Erickson said. “We go out and raise funds from individuals, corporations, and foundations to support the museum operations. There’s a very small revenue-generating line as well. …It’s less than 3 percent of the budget.” The city provides no operational funding.
Soto’s client, known as FGIC, commissioned a study of the Detroit Institute of Arts collection and found “likely buyers” who would spend up to about $2 billion for parts of the collection.
Plummer’s report, on behalf of the city and the DIA, valued the collection at between $2.8 billion and $4.6 billion but said that could drop as low as $1.1 billion if actually sold.
Soto questioned Plummer about his earlier statements about how much lower the collection would sell for as part of the bankruptcy and challenged his assertions that all works would be discounted.
“You might be able to sell ‘The Wedding Dance’ but there is an enormous collection at the DIA and I don’t believe there are enough buyers for that out there right now,” Plummer said.
Plummer is founder of Artvest, the New York art investment firm that evaluated the Detroit Institute of Arts collection for sale. He’s testifying as a city witness in support of the Plan of Adjustment during the bankruptcy trial.
Officials at the Delaware museum decided to sell William Holman Hunt’s “Isabella and the Pot of Basil,” and other works to raise money toward a nearly $20 million debt from a facilities expansion and to shore up the museum’s endowment.
Before the sale, Christie’s auction house estimated the 1868 piece would sell for $8.4 million. The actual going price? Just $4.25 million.
“It was the taint around that picture and the bad publicity around it,” Plummer said, “that resulted in a discount of 50 percent. It sold for half of what it was expected to sell for.”
The same scenario could follow any DIA liquidation sale, he said.
“There was an aura around that auction that related to her personality, her life, her mystique,” said Michael Plummer, as he testified in the bankruptcy trial. “The sale of the DIA would not be a celebratory event.”
Any sale of the DIA works to raise money to pay the city’s creditors would be met with resistance from the established auction house and art collector communities, Plummer said. That would lower prices.
“It would be considered to be a tragic event. It would not be sold in a celebratory fashion. It would not be marketed in a glamourous way. It would have to be sold in a discrete way and it would have an aura that was negative not positive,” he said.
Another problem with selling the DIA collection, Plummer said, would be the time it would take: years to catalog the pieces, several more years to sell it because dumping it all onto the market would be more than the high-end art market could bear.
“That would flood the market so if you had an orderly liquidation you can plan to mete out the property in batches that would ensure the market was not flooded,” Plummer testified.
Just storing the art before such a sale would cost $6 million, Plummer testified, and even when it was auctioned, up to 40 percent of it would likely go unsold.
Ron Bloom testified today in the city’s bankruptcy trial as the financial consultant for the Official Committee of Retirees.
The city’s Chapter 9 is not the first time Bloom has been involved in “Detroit” restructuring — except that the last time it was the “Detroit” defined as the auto industry and Big Three automakers instead of the municipal entity. He was part of the White House task force that worked on the General Motors and Chrysler bail outs, bankruptcy and restructuring.
Bloom’s experiences in that process didn’t come up while he was on the witness stand today, but we found a few perhaps telling accounts of his work in the book of a local author. Bill Vlasic, formerly of The Detroit News and currently the Detroit bureau chief for the New York Times, wrote about the auto industry crisis in his 2011 book, “Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers – GM, Ford and Chrysler.”
Here are a few passages from Vlasic about Bloom:
An easygoing Harvard Business School grad with a hangdog look and a crew cut, Bloom had been through some bruising restructuring battles in the steel industry. His experience would serve him well as the point man with the UAW. “You should know that my first goal is to preserve as many jobs as possible,” Bloom told Rattner.
March 26, 2009, was the day the president of the United States set aside time in the Oval Office to discuss what should be done with General Motors and Chrysler. The task force had been building its efforts methodically, and somewhat frantically, toward this moment. There was little debate among Rattner, Bloom, and the other six members about GM. Allowing GM to fail was not a serious option. But its plan had to be torn up and redone. And unless management could miraculously cut its debt and renegotiate its UAW contract, a controlled Section 363 bankruptcy was the best possible option.
The banks howled in protest at what they branded favoritism toward the UAW. As secured lenders, they had expected to get top priority in these high-stakes settlement talks. But as Ron Bloom so succinctly put it, Chrysler needed workers to build cars, not banks.
The lineup today includes witnesses Ron Bloom, Sue McCormick, Suzanne Taranto and Michael Plummer.
Bloom, who works for the investment banking firm Lazard Ltd., was the lead adviser to the Official Committee of Retirees in the Detroit bankruptcy case. He served as “auto czar” on the White House Auto Task Force that constructed the General Motors and Chrysler bailouts four years ago.
McCormick is the director of the Detroit Water and Sewerage Department. Taranto is an actuarial consultant who worked on retiree health care costs for the city. Plummer works at Artvest Partners and assessed the Detroit Institute of Arts collection earlier this year. More on that here.
The hearing is scheduled to begin at 8:30 a.m. and run until 5 p.m. We’ll have updates of the testimony throughout the day.
Michael Plummer described the dynamics of the Detroit Institute of Arts in the bankruptcy case as unique in the art world.
City attorney Geoff Irwin questioned him about whether a large museum’s collection has ever been sold or auctioned. “I had never heard of anything remotely close to this ever happening,” he said.
Irwin also asked him about his report, evaluating and valuing the entire collection’s worth.
“Such an evaluation has never been done before of this magnitude,” Plummer said.
Plummer did not finish his testimony today, but he’ll be back on the stand tomorrow. Also scheduled, Annmarie Erickson, the chief operating officer of the museum.
The next witness of the afternoon is Michael Plummer, the founder of Artvest Partners. The New York firm was hired by the city and the Detroit Institute of Arts to “assess the viability and practicality of selling art or otherwise monetizing the collection,” as described last summer by Bill Nowling, spokesperson for Detroit Emergency Manager Kevyn Orr.
Here is the report Plummer authored for the Detroit Institute of Arts.
Plummer is being questioned by city attorney Geoff Irwin, of the Jones Day firm. So far, they’re covering Plummer’s resume.
After the lunch break, Detroit Water and Sewerage Director Sue McCormick answered a few more questions from attorneys about financial projections, the 4 percent maximum annual rate increases and plans to upgrade the system.
Judge Steven Rhodes asked his own questions as well. He asked her about the new Great Lakes Water Authority and its impact on the department’s operation “especially as it relates to continued feasibility to provide water service for our area.”
She replied, “I generally see it as a positive. …. It would allay many of our concerns about access to affordable capital. I also believe based on the structure of the memo of understanding that the ability to help support some of the infrastructure renewals that are required in the city of Detroit without that being an impact on the customers.”
The new authority, for example, will use part of the planned rate increases to pay for capital improvements. Currently, the department borrows money for the entire cost of such projects.
When he asked her about the biggest challenges for DWSD, she said, “Unknowns. The things we don’t know.”
And , she admitted the new Great Lakes Water Authority is going to be a culture change for the department.
McCormick said it will be a “big shift” …with different metro area communities working together for the benefit of one system. The new authority will require what she calls regional planning terms … and she says there is a significant amount of work to be done regarding permits, the system, people and financial planning.
The new authority, for example, will use part of the planned rate increases to pay for capital improvements. Currently, the department borrows money for the entrie cost of such projects.
McCormick also admitted the department has an “undeniable history” but says “substantial progress and trust” has emerged. The new authority, she says is in the best interest of the system, the city and the region.
The current witness is Suzanne Taranto, an actuarial consultant for Milliman who analyzed health care costs for the city’s retirees (and dependents.) Milliman began working for the city in June 2012.
Taranto will be back on the stand after lunch and will continue her testimony. But here’s a bit of what she said this morning, while questioned by city attorney Evan Miller, of Jones Day:
*In 2012, the city had about 17,000 retirees. Of those, about 11,000 were Medicare eligible. The city also covered 8,500 spouses and dependents.
*The city had 24 different health plans for retirees: 10 for Medicare eligible beneficiaries and 14 for those who were not.
*The current liability for retiree health care is about $7.1 billion: about $3.5 billion for general service retirees and about $4.1 billion for police and fire.
The director of the Detroit water department, Sue McCormick spend more than an hour on the witness stand. But there was no discussion of the controversial shut offs. No questions from the city attorney who questioned her, Robert Hamilton, of Jones Day. No questions from any of the creditor attorneys.
A few things of interest from her testimony:
* The City of Detroit and Detroit Public Schools owe millions of dollars in overdue water and sewerage bills. “The city made little to no payment of their utility bills for the year preceding bankruptcy, and they had made, until recently little to no payment on their bill during bankruptcy,” McCormick said. “The school system has been struggling for a couple of years. A year ago, they were $10 million behind…They did enter into a payment. … We still have a bad debt remaining of over $5 million.”
* DWSD’s total budget is about $405 million.
* The Plan of Adjustment provide “adequate levels of funding” to protect the system from a “material risk of failure,” McCormick testified. “Like any system, I think we will almost certainly have failures. We will have water mains break. We will have sanitary sewers fail in very specific areas impacting customers. But a fail for the system overall and its ability to service customers? No, I don’t think so.”
Also related to the bankruptcy case, Judge Steven Rhodes will hold an evidentiary hearing on Monday about whether he will temporarily halt the shutoffs of water service for Detroit residents with unpaid bills. He previously ordered parties to mediation in the dispute.
In March, the Detroit Water and Sewerage Department began shutting off service to customers — eventually about 15,000. The shutoffs were halted for a month during the summer while the department informed customers about payment plan options.
Other than the water-related hearing, bankruptcy court will be postponed next week so creditors can respond to the new Plan of Adjustment, filed this week, the Syncora settlement and the formation of the Great Lakes Water Authority as part of the restructuring of the water department.
Early in the negotiations, Bloom testified, the Official Committee of Retirees (OCR) determined that pensions would be the priority over health care, partly because of legal arguments, partly because of the emotion attached, Bloom said. “Our initial position as the pension should remain untouched in its entirety but pretty early on we signaled that we could see compromise in the OPEB (other post-employment benefits), the health care,” Bloom said.
Barnowski also asked Bloom about how interested the OCR was in the overall revitalization of the city.
“We were relying on the city of Detroit to be there to honor these promises out into the future,” Bloom said. “The reality is as we observed, when you get yourself in bankruptcy, bad things happen. So we were, whether we liked it or not, betting on the city. The revised promises the city would make, whatever they would be, would pay out very time. We had to have belief that revitalization would occur.”
Bloom also said the political dimension of the bankruptcy has been apparent throughout his work with the case, and all parties have been keenly interested in the city’s long-term revitalization.
“This is a political environment. The city is a political entity. There are many stakeholders who are political entities who were involved in this case, whether that being the other counties, the state of Michigan itself and our perception, the committee’s perception, was that they had a keen interest in revitalization as well,” Bloom said.
As the first witness on Day 10 of the city’s bankruptcy trial, Bloom is being questioned by Dan Barnowski, an attorney for the Official Committee of Retirees (OCR), a bankruptcy court group, separate from other employee or retiree associations, labor unions or pensions systems.
Bloom described his work on the auto task force as involving a high ratio of retirees to active workers. For General Motors, Bloom said, there were roughly 10 retirees for each active member while at Chrysler it was 6 or 8 to one. The City of Detroit currently has about double the number of retirees for each active worker.
The OCR, Bloom testified, took its role very seriously as it members and their claims for pensions and lifetime health care costs represented a large amount of the city’ $18 billion debt.
“We viewed ourselves as representing by far and away the largest creditor interest … roughly 80 percent of the claim amount of the total unsecured claims amount in the city,” Bloom said. “We viewed ourself as a very significant stakeholder in the matter and an important creditor and we believed that we have very valid and important claims. Relative to our claims, I think in general our relationship with the city was professional.”
Before the bankruptcy petition was filed in July 2013, Bloom said the committee representatives objected to what the city had in its early plans for the case.
“The plan was not something we thought was remotely fair to the retirees, and so we had a pretty vigorous disagreement about how we thought the case should go. We took the position that the city didn’t belong in the bankruptcy court at all. We took the position that the pensions were constitutionally protected. We took the position that when the city tried to manipulate .. the retiree health care, that that was inappropriate and not consistent with the law. … We had a pretty serious disagreement at least from where the city started and from where we started.”
But the months of negotiations and Judge Rhodes’s ruling that the pensions are not constitutionally protected in bankruptcy led to movement on both sides, Bloom said.
Barnowski asked Bloom if he thought the city had shown favoritism to the retirees as compared to other creditors. Bloom replied no.
“We felt like we had very significant claims her both legal and political. We felt we were 80 percent of the claim amount and that justified a significant, some tension to our concerns,” Bloom testified. “We felt we had very strong legal arguments as the other protection of our position. We had been ruled against on that but we were appealing. We felt like we got the best we could get but in no sense did we view that as favoritism.”
One of the city’s actuaries, Alan Perry, is back on the witness stand, discussing pension fund forecasting. The next witnesses, according to attorneys yesterday, are Vanessa Fusco, who works at Christie’s and will testify about art valuation, and Kim Nicholl, an actuary with Segal’s Chicago office.
After hours of testimony by two actuaries, let’s review the main issue:
The city puts the unfunded liability for the two pension funds for 2014 at about $3.4 billion. Creditors have questioned the accuracy of that amount. If the debt is less, the city can set aside less for pensioners, leaving more for other creditors.
Attorneys for some of the creditors are challenging actuaries who support the city’s plan and the actuarial assumptions that it’s based on, especially the 6.75 percent rate of return presumed for pension fund investments. Two witnesses today said they supported the city’s assumption that pension investments will yield a 6.75 percent return. But they also testified that amount is less than almost every other large public pension system in the United States.
Certainly those calling the shots in Detroit’s bankruptcy case have plenty of reasons to err on the side of conservative in the presumed returns on investments for the pension funds: prudence and history.
Kim Nicholl, an actuary with Segal, the actuarial firm used by the Official Committee of Retirees, testified today about the amount of cuts pensioners in the General Retirement System will face under the city’s Plan of Adjustment:
Reduction Number of Pensioners
5-10 percent 1,864
10-15 percent 2,910
15-20 percent 3,155
20-25 percent 1,627
25-30 percent 989
30-35 percent 1,083
35-40 percent 366
40-45 percent 16
We’re stopped for lunch, but not before we got a few minutes of testimony from Kim Nicholl, an actuary with Segal’s Chicago office who worked with the Official Committee of Retirees. Her resume is entered into evidence. See you at 1:30 p.m.
The two highest valued pieces of art in the Christie’s appraisal were Pieter Bruegel the Elder’s “The Wedding Dance” and Vincent van Gogh’s “Self Portrait.” Here’s what Vanessa Fusco said about them in her testimony.
The Wedding Dance:
This piece was valued in the appraisal at $100 million to $200 million.
“There are so few works by the artist, so you can’t rely upon market activity, trading works by this artist. So you have to look more broadly to 16th century Flemish artists. Of this quality, very little actually comes to the market. Most are in public collections,” Fusco said.
A work the team used to compare to “The Wedding Dance” was Peter Paul Rubens’ “Massacre of the Innocent,” which sold in 2002 for $77 million, Fusco testified. “Adjust for inflation and arrive at the lower end of our valuation range,” for “The Wedding Dance,” she said.
“We think if this work were to be sold, it would break all records,” Fusco said of “The Wedding Dance.”
The Self Portrait:
Valued in the appraisal at $80 million to $150 million
“Here we actually have more direct comparables to work from,” Fusco said, adding another van Gogh self portrait sold for about $26 million in 1990 and a second that went for $75 million in 1998. “If you adjust those for inflation, you’re at sort of the upper and lower end.”
She said the DIA van Gogh “Self Portrait” is worth less than those two because it is smaller and from earlier in his career. The Dutch artist painted them in 1888 and 1889, and “1888 is actually a pivotal point in the artist’s career where his style changed dramatically,” Fusco said. “Later van Goghs are more highly valued.”
She said that “trophy hunters” would likely be very interested in purchasing the DIA’s van Gogh “Self Portrait.”
“This is an iconic piece,” she said.
“It’s a spectacular and world class collection. I had been to the DIA before (twice) and was extremely impressed,” she said. She mentioned the Diego Rivera frescoes, the impressionist, modern and European collection and the Dodge and Scripps collections as particularly notable.
Like many museums, Fusco said, the DIA most valuable and notable work is on permanent display. She called the museum’s collection encyclopedic and said the city-owned work “covers a wide range of art history”
“Generally a museum will put its most important work on view for the public and that can also translate into the most commercially valuable work,” she said.
According to Fusco’s testimony, when the Christie’s team of 65 specialists started the appraisal, they believed they would review about 3,500 works that had been purchased by the city but that number fell to about 2,700 because several of the pieces were no longer in the collection or had been incorrectly counted. For example, a teapot and lid has been listed as two item when they are, by art collection standards, just one.
It’s not unusual for such lists to be revised during an appraisal, Fusco said.
The team also found about a third of the city-owned art at the DIA has “incredible minimal commercial value.”
Irwin asked her why.
“Museum collections tend to be very uneven valuewise. Very simply: not ever work of art in a museum is a masterpiece. That’s not unusual at all and the way museums, in this country in particular accept their collections, they were accepting large gifts, estates, so not every work that gets gifted to a museum is going to be of tremendous value,” Fusco testified.
She described the DIA staff as being “very cooperative” with the Christie’s team doing the appraisal and could not think of “any impediments that the DIA staff threw up for your work,” when Irwin asked.
The city interrupted its actuarial and pension witnesses and called Vanessa Fusco to the stand. She’s the vice president and associate director of the museum services department at Christie’s.
Fusco also was the project manager for the fair market appraisal done last year for a portion of the Detroit Institute of Arts collection at the city’s request. Since then, there have been “competing” appraisals of the collection by creditors and the museum.
City attorney Geoff Irwin, of the Jones Day law firm, questioned her.
As you can see from this Michigan Radio timeline produced earlier this year, the city and the museum have had complicated and unique relationship.
Various attorneys spent a few hours questioning Alan Perry about the appropriateness of the 6.75 percent assumed investment return rate for Detroit’s pension funds and how it compared to other public funds. Then Judge Steven Rhodes asked a few questions, ending with this telling exchange.
Judge Rhodes: Are you telling me that given Detroit’s insolvency, is it your view that prudence would suggest an even lower rate?
Perry: Yes, that might be true.
Judge Rhodes: No further questions.
Jonathan Wagner, an attorney for the holders of the Certificates of Participation (pension debt), questioned Alan Perry, an actuary with Milliman’s, the city’s actuarial firm, about interest rate assumptions used for pension fund forecasting.
In the Plan of Adjustment, the city and creditors agreed to an assumed 6.75 percent interest rate for the two funds – one for police and fire and another for general service retirees.
Wagner reviewed with Perry several other Milliman forecasts for public pension funds that are higher than Detroit’s. Several of the exhibits, entered with the court, were taken from Milliman’s 2013 Pension Funding Study. In the study, one chart showed that the interest rate assumption for public funds ranged from 6.4 to 8.5 percent. Perry testified that 95 percent of public pension fnds have a 7 percent or higher interest rate assumption.