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  • 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.

  • 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 www.wdet.org. 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.

     

  • What They Said: Bankruptcy in the governor candidates’ town hall

    At 22:10 of the town hall face off last night, moderator Stephen Henderson, Detroit Free Press Editorial Page Editor, asked the candidates about Detroit’s bankruptcy and the emergency manager. Here is a transcription of the questions, the answers and the follow up from Republican candidate Gov. Rick Snyder and the Democratic challenger Mark Schauer.

    Freep columnist Nancy Kaffer weighed in on the topic in this piece today, and moderator Christy McDonald, from our Detroit Journalism Cooperative partner Detroit Public Television, reviewed the town hall today on WDET’s Detroit Today.

    STEPHEN HENDERSON: Detroit, the city of Detroit, has an emergency manager and is trying to get through a complicated bankruptcy. Is this the right policy, the right approach to the relationship between cities and states? Is there more the state needs to do to prevent cities from falling into those financial problems? And what do they need to do to help them out on the back end?

    GOV. RICK SNYDER: That was a big question, Stephen. Let me start the other way with actually what we’re doing now is we’re working on an early warning system to help communities because I never want to appoint an emergency manager, and it’s not a subjective process folks. It’s an objective process. I don’t simply decide that. Certain conditions in terms of a financial emergency have to exist first.

    With respect to Detroit I went through that in a very systematic way. Tring to work with the prior administration in Detroit to say “Let’s just work together.” That didn’t work. We did a consent agreement to say the city needed to do certain thing to get the city out of trouble. Those things weren’t done. So then it came to an emergency manager. So I appointed an emergency manager. And then it came to the question of actually putting Detroit in bankruptcy. That was one of the toughest decisions to be made in the United States. It was the right decision to make.

    Look at where we are today. We’re within a month to two months most likely of coming out of bankruptcy. We would have shed $9 billion of liabilities. If we hadn’t done this, the operating budget for the city of Detroit, more than 60 percent would go to paying past debts. There would be no money for services. In the meantime while this has been going on, what’s been happening? Streetlights have been going up. Trash is being picked up. Public safety is improving. Violent crime is down in double digit percentages in the city of Detroit. All these good things are going on and now we’ve transitioned back out because my goal is to have the emergency manger come in, do their job, get out, be done and get it back to the community with good oversight though so it doesn’t fall backwards. Stop and think: Have you ever thought you’d see Detroit as well poised for a bright future as you see today?

    HENDERSON: Congressman. You have opposed the emergency manager legislation, how would you handle all of this differently?

    SCHAUER: Well, first I believe in democracy. The people voted in 2012 to overturn that law. As governor, placing myself becoming governor in 2011, I would have abided by the will of the voters. What I would have done is personally led. As governor, I will be in Detroit. I will work out of the office on Cadillac Place and be a full partner with Mayor Duggan for the comeback of Detroit. Mayor Duggan is supporting me because he knows that I will be a strong and active partner. We need good jobs in our communities, but what I will do as governor, in addition to personally lead, is put together financial transition teams where we can be proactive. What our current governor has done, two things, is engaging in a strategy of fighting fires, fighting crises. Of course a $69 million revenue-sharing cut for police and fire in the city of Detroit didn’t help. But after cities get into financial crisis and school districts get into financial crisis, they assign emergency managers.

    The second thing, quickly, is I never would have cut retiree pensions. Our constitution is clear: pensions are guaranteed. Again, on top of the pension tax, cutting pensions through the emergency manager, as governor himself, is wrong. It’s hurting people. It’s no way to build a strong economy.

    HENDERSON: Governor, I want to give you a chance to respond to the question about democracy. You’re suspending local democracy when you send in an emergency manager. People in the state voted not to have emergency managers. How do you address that?

    SNYDER: No, what they said is, we’ve had EM going back to Gov. Blanchard in 1988. There have been a lot of EM before I stated this process. In fact, I inherited a number of them. What we did was enhance their skill set so they could do their job and get out. There was a ballot proposal that said certain aspects of it people didn’t like. We listened to that. We didn’t do those things. We put something back in place so we could move forward.

    Think about this: traditionally emergency managers were there way to long. So Detroit, other than the bankruptcy, the city is now running the city of Detroit. We have an emergency manager that now has left in Pontiac, Benton Harbor, Allen Park, Ecorse. It’s working, folks. We’re getting thee cities back on their feet that didn’t have an opportunity to before. Because we know how big the messes were.

    I’ve asked the Congressman. If you’re not going to do things like looking at bankruptcy, a very last resort. And again, it is constitutional. A federal judge said that. I’ve asked the question is, what are you going to do to pay those $9 billion in liabilities? How are you going to have a budget where you have 60 percent going to liability costs?

    HENDERSON: Very quickly, Congressman.

    SCHAUER: We’ll go back to a hypothetical if I had been governor without an emergency manager, that would not have changed the books for the city of Detroit. I’m not questioning whether the city of Detroit needed to go bankrupt but I would have personally led rather than having an unelected, unaccountable person do it and I would never have thrown Detroit city pensioners, police officers, firefighters under the bus. That hurts them.

    SNYDER: We didn’t leave them under the bus. We did the grand bargain, and I want to thank the bipartisan support of the Legislature to work with the foundation community. Retirees did take cuts but we minimized them. I appreciate them. They ended up supporting the agreement and I respect them for their great role in this settlement.

  • 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.

    Noon

    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 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.

     

  • Day 13: Detroit’s Bankruptcy Trial

    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.

    5:04 p.m.

    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.”

    4:42 p.m.

    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.

    4:30 p.m.

    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.

    2:35 p.m.

    A buzzing noise has caused a recess in the trial until 3:30 p.m.

    1:47 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.

    11:05 a.m.

    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.”

    10:01 a.m.

    Here is Buckfire’s first Expert Report.

    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.”

    9:37 a.m.

    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.”

     

  • Day 12: Detroit’s Bankruptcy Trial

    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.

    4:57 p.m.

    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.

    4:21 p.m.

    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.

    3:04 p.m.

    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.

    2:17 p.m.

    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.

    11:01 a.m.

    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.

    Here is his expert report.

    10:35 a.m.

    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.

    10:30 a.m.

    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.

  • End of the Orr Era, almost

    Detroit Emergency Manager Kevyn Orr is transferring control of the city’s government back to its elected officials, a major shift of power in the city that’s still in bankruptcy proceedings.

    Orr’s order, which details the role he will play and what powers he will have, came after 16 hours of closed-door negotiations involving him, the bankruptcy case’s chief mediator, Mayor Mike Duggan, City Council and other officials. Under Michigan law, the city council could have voted to remove Orr with a two-thirds vote.

    Orr will continue shepherding the city through the historic Chapter 9 case, the largest ever municipal bankruptcy. Duggan says he will now, finally have the authority to do the job he was elected to do. “While I had a good professional relationship with Mr. Orr, every single action I took was still subject to his approval,” Duggan says.

    Orr will retain the title of emergency manager until the city’s plan to exit bankruptcy is approved and implemented.

    Here’s what Detroit Free Press columnist Nancy Kaffer thinks about the move.

     

    Detroit EM Order 42