The city has had three witnesses on the stand today, so far, as the bankruptcy trial moves into its second week.
First Charles Moore returned to the witness stand. He’s a restructuring expert with the firm Conway MacKenzie, one of the city’s financial consultants that did revenue and expenditure forecasting. On Friday, he was questioned on direct examination by city attorney Robert Hamilton, of the Jones Day firm. Then attorneys for some creditors cross examined him: bond insurer FGIC and Oakland and Macomb counties. Today began with cross examining from Jamie Fields, who represents several employees, retirees and beneficiaries, according to court filings.
After Moore finished, city Chief Information Officer Beth Niblock testified for nearly two hours. She was followed by Caroline Sallee, of Ernst & Young, who did tax revenue forecasting as a city consultant.
Testimony is complete for the day, with Syncora attorney Douglas Smith in the midst of his cross examining of the city’s witness Caroline Sallee.
In rapid questions, he started out by asking her everything she is not an expert in: real estate, revenue projection, tax collection, accounting. Basically Syncora continues to attempt to proverbially poke holes in the city’s testimony and evidence relevant to revenue forecasting. If Syncora can show revenue will be higher, it can argue for more money to creditors.
Caroline Sallee remains on the witness stand being questioned by a city attorney. Here are a few items from her testimony in Detroit’s bankruptcy trial about how she calculated tax revenue projections:
*The city will continue to see population declines for 40 years.
*Detroit’s population is currently about 7.2 percent of Michigan’s total, and that is expected to drop to 6.3 percent by 2020.
*Residential properties account for about half of the city’s parcels, while commercial properties are about a quarter. Since 2007, home values in the city have decreased by 63 percent.
*Even if Detroit’s real estate value increases, it won’t mean a revenue windfall because of state law regarding tax collection on the assessed (taxable) property value. “Assessment would follow the market but your taxable value would be restrained. … the taxable value is like you’re carrying a weight. It goes up more slowly (because it’s capped every year by state law). It can only grow at the rate of inflation or 5 percent, whichever is less,” Sallee said.
*After the city finishes its citywide property appraisal, she predicts a value drop, with property values in 2019 being half of what they were in 2012.
*Population decline becomes “less negative” over time. “Employment trends follow that too,” she said.
As a manager in Ernst & Young’s Quantitative Economics & Statistics practice Sallee was responsible for creating the City’s 10- and 40-year property tax and state revenue sharing projections. Here is her report.
Under questioning by city attorney Geoffrey Stewart, from the Jones Day firm, Sallee explained the five steps she used to forecast Detroit’s general operating property tax revenues:
1-Forecast taxable value by property class.
2-Select the tax rate. (For Detroit it’s 19.25 mills.)
3-Calcluate tax levy.
4-Adjustment for legal and policy changes.
5-Apply an effective collection rate. (For Detroit, it’s about 50 percent on residential properties.)
“For a residential property there’s a number of reasons they’re not collecting,” Sallee said. Tax bills may be sent to the wrong property, people may refuse to pay or be unable to pay. “What we’ve seen in the data, there are fewer residential payers but it’s much higher for commercial payers,” she said.
After about 90 minutes of questioning by a city attorney, creditor attorneys got their chance with city Chief Information Officer Beth Niblock.
Under cross examination from bond insurer Syncora attorney Stephen Hackney, Niblock admitted she has fewer employees, including contractors, in Detroit than she did in her previous job in Louisville. She also said she’s expressed concerns that there are too few resources to accomplish the city’s technology improvements included in the Plan of Adjustment, but that they are needed.
“The hope is improving the IT systems will improve everybody’s ability to do their jobs,” Niblock said.
City CIO Beth Niblock began testifying after lunch about planned initiatives to upgrade technology for city employees and operations. She called them “reasonable” and said they would address many of the current needs.
Chief Financial Officer John Hill, who testified last week, is overseeing the adoption of a new financial management/human resources system. Court documents put the price of that at $26.2 million.
Niblock says another 75 IT initiatives are taking place throughout the city’s departments with “the bulk of them” happening in the police, fire and human resources departments.
As far as specific areas to address, Niblock, under questioning from city attorney Robert Hertzberg, here are some of the initiatives Niblock identified and what she said about them:
Microsoft Application Update, estimated at $13.5 million. City employees currently work on several different versions of Microsoft office products. Updating the software would allow, for example, employees to better share documents because they would be using the same version of a product.
Data Center Back Up, $10.9 million. “We need to have a supplemental back ups center so that we can put servers and have equipment to have redundancy and resiliency in the network.”
Hardware upgrade, $11.7 million. This include modern desktop and laptop computers. “It will also address the network hardware. We have old routers and switches on the network that need to be updated,” she said. Additional server and storage upgrades are included.
Citywide imaging and document arrangement, $5.4 million. The city currently store paper files, but this initiative would allow electronic record keeping.
Worktrain upgrade, $3.6 million.
Citywide network infrastructure, $4.2 million.
Active directory service migration, $2.0 million.
ERP system maintenance, $2.8 million.
Helpdesk Structure, $2.0 million.
Operating System Upgrade, $1.0 million.
SQL Server Support, $700,000.
Detroit’s Chief Information Officer Beth Niblock testified about the horror show that is the city’s technology infrastructure:
The weekend power outage took out the city’s data center. Code has been in place for 25 years. Software is generations behind. Antiquated desktops take 10 minutes to book. Email is atrocious. She loses sleep over the city’s payroll system.
Court is on a lunch break now, but I’m expecting some afternoon testimony about how the city’s Plan of Adjustment and its proposals to invest in technology will help city services run more smoothly and eventually save money.
Detroit chief information officer, Beth Niblock, took the stand at 10:50 a.m. She is currently being questioned by city attorney Robert Hertzberg, of the Southfield law firm of Pepper Hamilton. They are covering her education and career history.
Niblock left the city of Louisville in February for the Detroit position after Mayor Mike Duggan drove to Kentucky and convinced her to move to the Motor City.
When attorneys had finished questioning Moore, Judge Steven Rhodes spent nearly 40 minutes asking questions and hearing Moore’s answers. Some related to Conway MacKenzie’s contract with the city. Moore said the current contract runs out at the end of this month, but talks are taking place to extend it. Rhodes asked about what those discussion entailed.
“Our goal from the beginning, and especially right now, is to have it set up so that the city can operate without our involvement. It’s very clear, and I certainly don’t like to speak on behalf of others, but I think Mr. Hill (the city’s chief financial officer who testified last week) has indicated we have not gotten to that point yet. So what we’re specifically talking about is when is that point and how do we get to that point,” Moore said.
Rhodes also asked about Moore’s meaning use of the phrase “cultural deficiencies” during his direct examination.
Moore’s answer: This is something that the court’s expert touched on and I agree with. There are pockets, way too many pockets within the city, that don’t necessarily feel that it is their responsibility to provide a certain level of service, that it kind of goes the other way around: people are there to be served. From that standpoint, it’s ingrained in the culture in many areas of the city within certain departments, that people don’t have to perform to a certain level. … The lack of resources to track and monitor how individuals and departments are performing has contributed to that, and there’s no question that all of the budget cuts that have been realized have left people somehow helpless … people not understanding or perhaps not feeling that they have to perform to a certain level and not having the management or leadership that holds people accountable.
Moore estimates that fraudulent workers’ compensation claims total about $35 million annually with about $14 million within the Department of Transportation.
Judge Steven Rhodes questioned Moore about how fraud, waste and abuse might be reduced within the city because of provisions of the Plan of Adjustment.
“Within many of the collective bargaining agreements, the new agreements that have been struck, there are significantly more management rights that have been built in,” Moore said. “That will be an important element as well as having the right, qualified people in the management roles to carry that out.
As part of the bankruptcy negotiations, the city and several employee groups reached five-year contracts. Some information about those is here.
Moore on Friday offered as an example of how the Annuity Savings Fund investment program benefited city workers one particular retiree who invested about $100,000 and received a $1.4 million payout after 42 years of employment. That amounted to an interest rate of 13.6 percent, he testified.
Under the bankruptcy’s Plan of Adjustment, if approved, the retiree’s repayment amount would be about $120,000, which leaves a roughly 13.2 percent interest rate over the life of the annuity.
The first two people cross examining Moore, Jamie Fields and John Quinn, focused largely on the facts and assumptions Moore used to calculate and forecast related to the Annuity Savings Fund. That’s a program that allowed non-uniform city employees (everyone but police and fire) to invest 3, 5 or 7 percent of their after-tax income in a fund co-mingled with the general pension funds. The annuities had a guaranteed rate of interest regardless of how the fund actually performed.
As part of the bankruptcy negotiations between the city and creditors, several employee and retiree groups agreed to allow a partial recoupment of “excessive” interest payments on the annuity savings fund. The provision was in the plan that the pensioners approved in their vote on the Plan of Adjustment. The recouped funds would be put back into the pension fund to make up what the city calls “excess interest payments” made to pensioners who have collected their annuity savings funds.
Fields, a Detroit-based attorney, represents a group of employees, retirees and beneficiaries. Here is one of their objections to the Plan of Adjustment. Quinn has filed multiple objections, including this one, and dozens of retirees have filed joinders supporting his arguments.
The first week (ok, four days because of Labor Day) wraps up today in Detroit’s bankruptcy trial, and we’ll be blogging from the courthouse when testimony resumes later this morning (See below). The city’s Chief Financial Officer John Hill will be back on the witness stand where he’ll continue to be cross examined by bond insurer Syncora’s attorney. Syncora, of course, objects to Detroit’s plan to restructure its debts as the Bermuda-based company stands to be paid 10 cents on the dollar for the hundreds of millions of dollars the city owes it.
And here’s a bit of the work from our colleagues who are sharing space in the media room during the trial:
WDIV’s Rod Meloni has been covering the case nearly full time. His latest work is here with links to previous stories. WXYZ’s Jim Kiertzner also regularly files about the bankruptcy. Watch his stories and read his blog here.
Another diligent reporter is Steven Church from Bloomberg. His latest story, which takes more of a national perspective, is here.
We are finished for the day. Charles Moore will return to the witness stand, as his cross examination is not finished.
I’ve got some catching up here from some of what we heard today — I’ll do a separate posting over the weekend about the testimony related to the recoupment of Annuity Savings Fund monies from retirees.
We’ll be back at 8:30 a.m. Monday. The city is expected to call Beth Niblock, who is in charge of information technology for the city.
Earlier today, Charles Moore testified that Detroit fire fighters had balanced pop cans on a fax machine so that when an emergency transmission came in, the sound of the cans falling would alert them.
Many of us in the media room thought that needed to be checked out and verified.
Well, Tresa Baldas from the Detroit Free Press did. Here’s her story.
Detroit is so broke that firefighters get emergency alerts through pop cans, coins, door hinges, pipes and doorbells. And they make these gizmos themselves … In most cities, fire officials say, when an emergency alert comes into a fire station, a series of bells sound off – like Morse code. Then an automated voice offers instructions on which engines go where. “Well, we don’t have that system here,” (Detroit Deputy Fire Commissioner John) Berlin said. “The firefighters modify … they improvise.”
Perhaps we will get some additional information during the cross examination, but Charles Moore just testified that under the Plan of Adjustment, the mayor’s office would add $20 million in additional labor for “lean resources” but save $17.5 million in other budget items.
The City Council budget shrinks, primarily because much of the planning commission functions are moved to another department. There is a planned $200,000 investment in staff training for council employees.
36th District Court would have more of a paperless court system, so much of the $4.2 million in planned technology spending there would go toward that. Other resources are going toward improving the collection rates of tickets, judgments and “anything else the court could collect” from 20 percent to at least 50 percent.
We’re back in session with Charles Moore still on the witness stand. Before the lunch break, he testified that the former Detroit City Airport would see nearly $16 million of upgrades if the current Plan of Adjustment is adopted, according to testimony this morning.
Moore said the improvements are aimed at maintaining the operating certificate at the airport, officially known as the Coleman A. Young International Airport.
“There are a variety of potential uses for the airport,” he said. “The airport under the FAA has to comply with federal guidelines and, in particular, the airport operating certificate is to ensure that there is a level of safety involved.”
Detroit has about 300 parks, but nearly 200 have closed over the last several years.
Mayor Mike Duggan wants them all re-opened, according to testimony today.
That’s why the city’s Plan of Adjustment calls for the parks and rec department to spend $38 million to bring them back online along with a handful of recreation centers around the city.
“This is a very significant initiative for the mayor,” Charles Moore testified. He’s a restructuring expert. “He has indicated this is very important for the livelihoods of the residents in the neighborhoods as part of re-opening those parks. There is a level of investment that is required.
Restructuring consultant Charles Moore just discussed how the city’s Plan of Adjustment addresses the Detroit Department of Transportation. DDOT covered 16 million miles of routes in 2009, he said. That was down to 12 million miles last year.
To cover those roads, Moore said the city currently SHOULD have 230 buses. “Unfortunately, right now, it’s only 190 or so. As a result of that, even though there are routes being driven, when there are not buses available, those riders don’t get picked up,” he said.
Another concern: “The department has numerous safety issues for a variety of reasons,” Moore said. They have been related to: riders assaulting riders, riders assaulting drivers and workers’ compensation claims. Specifically, five drivers have been assaulted. Two of those were stabbed.
Moore testified there are about 30 911s calls made each month by Detroit bus drivers. Cameras on the buses and additional security are planned.
The plan proposes that $100 million is invested in the department and that fares are raised to generate revenue. Currently most fares are $1.50. “This contemplates in a step fashion that by the end of FY 2023 the fare will be $2.50,” Moore said.
Clearing up worker’s compensation claims also should force some cost savings, he testified.
While on the witness stand and questioned by city attorney Robert Hamilton, restructuring expert Charles Moore from the Conway Mackenzie firm walked through some of the public safety improvements and investments provided for in the Plan of Adjustment.
“We turned over every rock in trying to under how the departments are operating now,” Moore said, “and how they might operate better.” That includes analyzing how an increase revenues including procuring grants, including from the federal government, and charging for services including false alarms and other things that cause the departments to make unneeded runs.
As Detroit has 5 times the crime rate when compared to comparable cities, based on FBI statistics, Moore emphasized the importance of improvements in the Detroit Police Department as related to improvements in the quality of life in the city in general. He also addressed what’s proposed for the fire department.
The city’s Plan of Adjustment calls for the following for the Detroit Police Department:
$179 million in additional operating expenses.
$91 million for the “fleet,” in part so that vehicles can be replaced every three to four years
$175 million in technology upgrades including hand-held radios and better integrated communication and computer systems.
$34 million for capital improvements, including new precincts and a new training facility, because the existing one “is in significant disrepair.”
$150 million in cost reductions within the police department. Nearly $88 million of that would come from “labor efficiencies and attrition” in the police department. For example, “Newer officers coming on at the lower end of the pay scale,” Moore testified. It would not be a reduction uniformed officers but in administrative positions.
For the Detroit Fire Department, Moore said the need for improvements is clear: response times were 9 minutes for firefighters and 18 minutes for emergency medical services. The national standard is 6 minutes.
$59 million to be spent on the DFD fleet, which includes replacements of vehicles.
$71 million in capital expenditures that would repair and replace several fire department facilities. Some of the city’s older site don’t accommodate current equipment. Also, “Where firehouses are located is very important,” he said. About $30 million is intended to repair existing facilities. About $20 million would pay for equipment such as boots and coats.
“I know from many discussion with the fire department, this has been a bit of a bittersweet process. Certainly on the one hand, having better equipment, being able to respond and do their job better is a positive, but they also recognize the Chapter 9 process has been difficult on employees,” Moore said. “They recognize it will improve the morale, but they also recognize it has been difficult on employees.”
Restructuring expert Charles Moore is covering blight initiatives, that are provided for in the city’s Plan of Adjustment.
Specifically, he described the comprehensive database done by the Motor City Mapping Project.
And he gave some numbers:
An estimated 80,000 properties are either blighted or showing signs of blight.
It would cost an estimated $850 million to remove all of the blight in the city.
Some $52 million from a U.S. Department of Treasury program that was intended to mitigate the foreclosure crisis will be used to remove blight, as city officials convinced the feds to modify provisions of the program.
Moore also described “blexting,” a mobile app that allows individuals to text in the address of dilapidated structures around the city.
“If they see signs of blight, they can enter it into a database so the city is aware of it and can perhaps take action before it gets too far,” Moore said.
Now on the stand is Charles Moore. He’s a restructuring expert at Conway MacKenzie, a Birmingham, Mich.-based firm that is one of the city’s consultants.
His testimony, based on research and analysis Conway MacKenzie has done since January 2013, largely focuses on projections that show under the Plan of Adjustment, the city would increase revenues by $438 million over the next decade while cutting $358 million in expenses.
He’s being questioned by city attorney Robert Hamilton, who works at Jones Day in the firm’s Columbus, Ohio office.
Meanwhile, here’s the city’s contract with Conway MacKenzie.
Judge Steven Rhodes had questions of his own for Detroit CFO John Hill. Here’s part of their exchange.
Judge: Are you familiar with the city’s plan?
John Hill: Yes I am your honor,
Judge: As the CFO of the city, what would you say are your responsibilities in the city’s implementation of the plan if it is confirmed?
J: I believe that I have a number of different responsibilities in the implementation of the plan. One of the first responsibilities is to take the plan and really translate that into documents and processes that the city can respond to. The plan has utilities built into it, basically three different areas where it is actually uniquely different for the city. One is with people, one is with processes, another is with systems. All three of those things, I believe, are needed to move Detroit to a new future. So my responsibility is to make the plan real by putting in documents and in systems that can be acted upon. And then also to provide information. Accurate, complete, objective information to all of the parties that have an interest in the plan. I view, and I think some of the way that I’m approaching it comes from how I viewed the work that we did in Washington D.C.. Within this plan, there are a number of organizations companies, people who are not being paid what they were owed. No one can argue that question And the plan also allows the city to use some of the funds that would have gone to these other creditors but for the bankruptcy if they were available to invest in systems, processes and people in order to improve the city on a long-term basis and improve outcomes and also to try and put the city in a place where it would be able to pay something eventually to these creditors. It’s kind of the way that I boil it down and I think there is a fundamental responsibility for the city to report exactly what those funds are used for and report exactly what those funds were able to do as a result of being allowed to spend them. That’s how I approach my role. It’s also to make sure that the Mayor and the Council, other decisionmakers in the city have the information that they need in order to make real decisions, not decisions that are made on dated information or information that isn’t complete but decisions that are based on information that has been analyzed and studied and looked at. So the improvement in all of the processes including the creation of the financial planning and analysis group is to create that capacity in the city to use information at much higher levels to make these kinds of business decisions. I’ve also taken on the responsibility that if there’s a hole now that has to be filled at some point in either some of the HR processes or other places in the city, and I don’t have a responsibility for HR but I can’t get done what I need to do without that assistance so I’ve had to create that. So I believe that we can’t let existing structures stop us from moving forward in this plan so my responsibility is to identify all of the impediments associated with implementation of the plan and try and mitigate against those risks. That’s why I say it’s not going to be easy to implement If you go into this thinking it will be, I believe that you will fail.
Judge: That’s a good Segway to my next question which is what challenges do you foresee that you will have in carrying out your responsibilities if this plan is confirmed?
JH: I think the biggest challenge is racing against time. In the District we found that once there was a perception that the crisis was over, it was very difficult to get movement, and so we have to move very, very quickly to put the infrastructure in place and try to make sure that that crisis mentality in trying to get change done continues. The other issue is that this plan calls for a level of cooperation among a lot of different organizations within the government, particularly IT operation. Before Beth Niblock came, I had some concerns about me be in charge of IT as I have told you. … I am not an IT director. She’s one of the best. So it’s getting the resources at the leadership levels in government that can really make the difference … Do you know the mayor actually drove down to Louisville to meet with Beth in the evening and convince her to come here? That kind of dedication to go after the right people in the right places is exactly what I think we need. The work that’s been done by the Emergency Manager so far to help us with grants management in setting up that office of the CFO and all of the support we’ve gotten from the contractor and the people in the city has really given us a head start of what’s in the plan. That also gives me a lot more assurance that we can do this. So it’s the capacity to handle all of this at the same time which we’re working through, and to be able to attract the people and the resources that we will need … to lead this effort ultimately.
Judge: What advice do you have for the Financial Control Board?
JH: One thing that’s already built into the legislation is a close working relationship with the CFO. I think working with the city, the Mayor and the Council to establish at the very start, the type of reporting that is to occur on a regular basis. I would also tell them, don’t hesitate to act. I believe they will be able to keep up with the Financial Review Commission, but I also believe that the pressure will help to keep things on track, and it will be their responsibility to help make sure things are on track.
The other think the Control Board (in Washington DC) did that I think was very helpful to the city and it’s kind of the relationship I have now with the Financial Advisory Board that’s in place, there are leaders that have expertise that I rely on now in order to help with some of the decisions that need to be made. They’re experts in finance, experts in IT, experts in HR. … I met with them, talked with them picked their brains and asked questions. I think being a part of providing that expertise to the city is a major part of the work they would do.
Professional exercise rather than a political exercise, I also weigh more heavily. I understand the importance of politics in helping to solve these issues, but these are tough issues that require people who have deep skills and so the more of those individuals you can have on the board versus the political people, I think the better.
Syncora completed its cross examination of Detroit Chief Financial Officer John Hill. Debra O’Gorman, representing Macomb County, had a few questions, mainly confirming that Hill had limited insights about the Detroit Water and Sewerage Department. (See opening statements for a brief discussion of how that relates to the city’s bankruptcy case…)
On re-direct, city attorney Geoffrey Stewart asked a few questions to counter Syncora’s assertions that Detroit could raise taxes to generate more revenue (presumably to pay creditors what’s owed them instead of erasing debt through the bankruptcy). Stewart also clarified what differences exist between Detroit and Washington D.C. , where Hill was involved in financial restructuring.
In doing so, Hill mentioned the political dimensions of Detroit’s bankruptcy. His statement (below) has interesting (insulting?) implications for the city’s elected officials.
Here are parts of what Hill said:
In Washington D.C. “Congress acted quickly … The deficits never went as deeply as the deficits went here. Also, the Congress has exclusive jurisdictions over Washington D.C. The citizens of Washington don’t have a vote in the Congress of the United States, so the ability to act without political repercussions from people who elect you was also a factor that helped the Congress move very, very quickly.”
And about the possible effects of raising taxes?
“In some cases increasing tax rates actually lowers taxes. It’s getting into what’s commonly known as a death spiral. And Detroit, which is a highly taxed jurisdictions and also one that is obviously suffering from a long-term economic crisis, I would not at all think that raising the tax rates at this time would be an appropriate strategy here. In the District, although the top tax brackets were raised, there was also relief at the lower end and now the district is looking to lower taxes across the board. And remember, it’s a state and a city so it has state taxes. It has property taxes. It has income taxes. It has any taxes you would have in another jurisdiction. They also lowered the sales tax as well, and so I think it would be very difficult to imagine a scenario where this city would benefit from raising taxes.”
See below for updates throughout the day. WDET’s Sandra Svoboda is in the federal courthouse following the proceedings. She’s also on Twitter @WDETSandra.
Opening statements are stretching into a third day in Detroit’s bankruptcy trial, technically a confirmation hearing on the city’s Plan of Adjustment — the “blueprint” for how to restructure debt and reinvest in city services. Bankruptcy Judge Steven Rhodes is presiding over the hearing and will eventually confirm or reject the Plan.
Most of the attorneys who have chosen to make opening statements have taken longer than they predicted to introduce the reasons they support or object to the bankruptcy restructuring plan. As the trial continues — it’s scheduled into October — the city, its supporters and creditors will put witnesses on the stand to help the judge decide if the plan is feasible, reasonable and not unfairly discriminatory to creditors. Those are standards used in bankruptcy law to decide if the plan to shed debt is adopted.
Syncora attorney Douglas Smith continues to cross examine Detroit’s Chief Financial Officer John Hill, mainly by suggesting measures Detroit could take to increase revenues. A few of Smith’s latest ideas: implementing taxes on vacant and blighted properties. (This is done in Washington D.C. where Hill lives.)
Hill tried to address the feasibility of such proposals. “You have to look at collectability,” Hill countered.
Bond insurer Syncora stands to lose hundreds of millions of dollars in the bankruptcy restructuring. The city’s current Plan of Adjustment proposes paying the Bermuda-based company about 10 cents on the dollar.
Through his questioning of Hill this afternoon, Smith is making a case to Judge Steven Rhodes that the city could 1) do more to increase its revenues 2) reduce its expenses 3) adjust its financial projections that would, on paper, show more available cash in the restructuring that could be paid to financial creditors such as Syncora.
With testimony this afternoon largely focused on detailed financial charts on display in the courtroom, there have been some tedious discussions. City attorney Geoffrey Stewart wrapped up his questioning of Detroit Chief Financial Officer John Hill after about three hours, and now Syncora attorney Douglas Smith is cross examining him.
Smith’s questions have so far focused on brightening the city’s financial picture. He’s asking about what revenue isn’t collected and when it might be. For example, “tens of millions” of dollars go unpaid on properties, Hill admitted under questioning. Grants could be better managed — funds have gone unspent and had to be returned in the past.
Smith also turned to the question of how the city might better collect income taxes and asked about what initiatives are coming to ensure payments from “reverse commuters”: Detroit residents who work outside of the city and do not pay the income tax they owe.
Hill says there is a plan in the works for “piggybacking” of the city’s income taxes with the state’s collection of its income taxes. An agreement is being discussed, he said, and it would increase collection rates. City residents pay 2.4 percent in income tax.
The initiative could start in 2016 for collection of the 2015 tax year. “It has to be phased in because of the withholdings,” Hill said.
Attorney Smith raised this issue with the trial’s first witness, Robert Cline, a financial advisory who appeared Aug. 18 because he took a new job in Europe and was available after that day. Incidentally, a Citizens Research Council of Michigan report cites a study that found $142.3 million of individual and corporate income taxes go uncollected by the city..
Court is on lunch break. Here’s the last thing city CFO John Hill said on the witness stand: Of the $1.7 billion the city intends to put toward restructuring and service improvement, about $200 million will come from the loans. The rest will come from surpluses from the plan and from initiatives that decrease expenditures and increase revenues.
Attorney question: How important are the restructuring initiatives to the success of Plan of Adjustment as the city exits bankruptcy?
Detroit Chief Financial Officer John Hill: “I think they’re very important. What is also very important is improvement in the financial management systems which is one of the restructuring initiatives. Without that improvement, it would be very difficult for the city to get the kind of information it needs to operate. … I could not imagine some of these initiatives not being done and the city either improving its operations or its access to information or its ability to control its resources.”
Attorney: Is there a master schedule anywhere for the restructuring initiatives?
Hill: “We have a schedule that actually shows the restructuring initiatives that have been applied for funding.”
Attorney: Who will ensure the initiatives are completed?
“I believe the CFO, I’ve taken responsibility for that. I believe ultimately it’s a joint responsibility between the CFO and the mayor because these are restructuring initiatives that need to have operational oversight as well.”
Here are some excerpts from the testimony of Detroit Chief Financial Officer John Hill. (More below!)
On the Plan of Adjustment:
“We definitely believe that the plan gives us a road map to how we should be operating.”
On if the city could change provisions of the Plan of Adjustment:
“There has to be approval for deviation from the plan by the Financial Review Commission, and so the plan really becomes a road map for how we would operate going forward.”
On improvements being made to accountability within city government:
“There have been issues in the past where people started contracts without approval but those holes are being plugged.”
Detroit CFO John Hill’s testimony covered his relationship with the mayor, likely an effort by the city attorney to show that reforms in the Plan of Adjustment that are already underway would be supported by the city administration after the bankruptcy case is complete and Emergency Manager Kevyn Orr’s term ends.
Hill has a direct-line reporting relationship with Orr and a dotted-line relationship with Mayor Mike Duggan, he testified.
“But that’s not really the way we’ve operated,” Hill said. “The dotted line means the mayor has an interest in the work I’m doing but is not able to direct that work. … I’m in at least three meetings a week with the mayor, I have a one-on-one meeting with the mayor. All of the plans I want to implement I have detailed discussions with the mayor on those plans. The mayor is a part of the review process for determining the quality-o-life projects that move forward so we coordinate with the mayor on that. It’s pretty much the normal relationship you’d expect with the executive of a city.”
Hill says he would “be upset” to leave some of the projects he’s started because he wants to see them through. And that could take a couple years.
City attorney Geoffrey Stewart asked Hill if he’s had conversations with the mayor about staying on past the current contract time. Hill said the mayor asks him if he’s “bought a house yet.”
“I’m more of a downtown condo guy,” he said.
An attorney for the city is questioning Hill about how financial operations are being restructured (read: improved.)
Hill described how property tax assessment capabilities are being improved with the help of helicopter- and street-level data collection.
“We will have data verified for every property in the city,” he said. “We are right now going through the verification of that entire database.”
Grants are being better managed, and new systems are being purchased, Hill testified.
“We’re in the middle of a fast-track process to acquire a new financial management system,” Hill said, adding the city has two that it has two cloud-based system it is choosing from. “We are currently evaluating both systems with the help of a consultant and we believe we’ll have a selection by the end of September.
The new system, he said, will allow better accounting, reporting, monitoring and reporting. Hill said the city did not close the books monthly and evaluating the yearly reports was challenging.
“The annual statement took us a very, very long time to prepare and have audited,” Hill said. “We put a team in place to make sure the audit became a priority. The Emergency Manager and I wanted to make sure that we got the 2013 audit done, and it was, and we also have a team now that’s working on monthly closes for our financial statements. We’ve begun identifying all of the issues with those monthly closes and we’re working on those now.”
The first witness is on the stand, city Chief Financial Officer John Hill. He’s being questioned first by city attorney Geoffrey Stewart, of the Jones Day firm. Here’s Hill’s expert report related to the Detroit bankruptcy case.
Hill was the executive director, the top staff member, of the Washington D.C. Control Board that worked to restructure that city’s financial and operational management systems. While there, he also worked with department heads to improve efficiency and with the mayor and city council to get them to support “necessary changes” including reductions in staff. There also were efforts to forecast revenues and expenditures. He also worked at Andersen where he was the partner in charge of state and local government-related work and now operates his own consulting company.
At the invitation of Emergency Manager Kevyn Orr, Hill has been CFO in Detroit since November where he’s helped establish that office and “managed the consensus budget process” that is being put in place.
He’s also working on grants management. Here is Orr’s order that established a Grants Management Department.
Hill has a contract through September, though he expects that will be extended until a new CFO is appointed, per the new state law requiring such a position in the city. That measure was a condition of the city pensions receiving $195 million in state money as part of the “grand bargain.”
AFSCME Council 25 is represented by Richard Mack, who concerns are similar to the UAW attorney. AFSCME represents employees whose pension and health care benefits are PAID for by a separate entity — the state, for example. But since those benefits are administered by the city, they are proposed for cuts in the Plan of Adjustment.
“They’re impairing benefits that have already been paid for,” Mack said. “I think that’s an important point.”
State law, Mack said, prevents the city from cutting contractual obligations. “We would simply ask that the plan not be confirmed unless those provisions are removed,” he said.
UAW attorney Peter DeChiara objects to the plan because of cuts it makes to library employees’ and retirees’ pensions and health care benefits as well as its requirement for the recoupment of annuity savings funds.
“The library is not a debtor in this case and the library’s obligation are not debts of the debtor that are subject to adjustment by this court,” he said. “(The library) engages independent of the city in collective bargaining with units that represent its employees, including the UAW. …It is the library not the city that pays out of its own fund the pension contributions for employees and retirees” and has done so since 1938.
“It continues to make those contributions today,” he said. The benefits are administered by the city.
They repeated some of Quadrozzi’s arguments related to DWSD, mainly the $428 million that the city intends to move out of the DWSD budget and partially into the citywide pension funding.
“If we take money out of DWSD at this point, we are going to render it vulnerable to capital breakdown,” Newman said, adding he agreed that $4.5 billion should be a target for the amount of structural improvements to the system.
Representing Oakland County, attorney Jaye Quadrozzi objected to the portions of the city’s Plan of Adjustment that involve the Detroit Water and Sewerage Department. She was critical of the city’s plan, in part, because of the financial projections it uses to calculate DWSD-related budget forecasts. She said the city’ plan would cause “untenable deficits and shortfalls” to DWSD budgets.
She questioned the city’s plan to replace just 1.5 miles of the system each year, pointing out it would take 561 years to complete such a project. And what happened 561 years ago? “It was the end of the Middle Ages,” she told the judge. “DWSD clearly needs more than that.” Quadrozzi said Oakland County would like to see 8.5 miles replaced annually and she called for a $4.5 billion investment in the system for the work.
The judge halted her statement.
Judge: You can’t come to court and say the city needs to spend $4.5 billion on capital improvements without an answer to the question of where the money is going to come from.
Quadrozzi: I believe the answer to that question lies in a number of legs of a DWSD table.
She went on to say one leg is “keeping DWSD money inside DWSD.” Another leg is internal reforms to operations. “We would suggest that’s undergoing slower than Oakland County would want and I think slower than DWSD itself would want. … There is an effort to optimize within the organization.” The third leg, according to Quadrozzi, is “rightsizing.” She said, “DWSD has a huge service area, thousands of miles” and called for “an analysis for what can be done to shrink the system to provide the essential service that needs to be provided.” She described the fourth leg as raising rates.
Judge Rhodes asked Quadrozzi several questions during her introductory argument, telling her “I raise these questions not because I have any preconceived notions about the answers, but now is the time to solve these problems. It’s not enough to just say we have problems.”
Judge Steven Rhodes opens today’s proceedings. Jaye Quardrozzi, an attorney for Oakland County, has about 15 minutes left in her opening statements. She’s objecting to the plan because of the provisions related to pension funding and the Detroit Water and Sewerage Department. Oakland County has 62 municipalities that are part of the city system.
Also expected this morning making opening statements objecting the plan are attorneys representing Macomb and Wayne counties, the UAW, which represents library employees, and AFSCME Council 25.
The country’s biggest municipal bankruptcy trial enters its second day with opening statements continuing where they left off yesterday.
5:09 p.m. Court is wrapped up for the day. Jaye Quadrozzi, attorney for Oakland County, will re-appear tomorrow morning as she did not finish her opening statement. One of her topics was an objection to the 6.75 percent presumed rate of return on pension investments the city has included in its plan. Here’s part of her exchange with the judge:
Judge: It appears that accepted actuarial science and practice, if that’s what Gabriel Roeder (Smith & Company) and the plan followed, created a very large, somewhere between $1.5 billion and $3.5 billion UAAL (unfunded actuarial accrued liability). Yes?
Jaye Quadrozzi: I believe so…
Judge: Whatever the UAAL is, it occurred when this actuarial science that you are relying upon was used?
JQ: That is correct
Judge: Well, I hate to invoke my mother, but she used to say that just because everyone does it, doesn’t make it right.
JQ: I’m all for mothers. However, the fact of the mater is, not that there is UAAL but that the city has proposed an UAAL that is overstated and nearly everyone you hear will testify to that.
Judge: Using actuarial science that got us into the hole we’re in now.
JQ: They’re not using actuarial science.
Judge: What I’m asking is the experts you’re relying on to say that this rate of return, this .75 percent, is to low, are actuaries whose science got us into the hole we’re in in the first place.
JQ: I would agree with you, but I think simply because an event or group of events happened that caused the UAAL to exist, that you don’t look t sound methods or practices to get out of that difficulty and the city did not do that, your Honor. I think in large measure because they have created a UAAL that is based upon incorrect assumptions, that hey put themselves in a position to propose a plan that does something that is prohibited by law. For that reason, Oakland County objects to that portion of the city’s plan.
Judge: I guess the broader question I have is: if you have an investment enterprise, whether it is a pension plan or whatever it is, that has fiduciary obligations and is obligated to invest as a prudent person would invest, right, would that kind of investor on a long-range basis, which is I guess what we have to look at, be able or reasonably expect to achieve a 6.75 percent rate of return?
JQ: Yes and more than that. We will present expert and fact witnesses that will testify to just that.
4:26 p.m. Now up is Oakland County’s attorney, Jaye Quadrozzi. She says she’ll focus on the structure and legality of pension contributions from the Detroit Water and Sewerage Department that are part of the city’s restructuring plan.
“DWSD is critical to the regional economy and quality of life in this area,” she said. “It’s one of the largest water and sewerage departments in the nation. … You can see why Oakland County is concerned.”
The County is “party to contracts through which DWSD provides water and sewer” services to 62 townships and villages in Oakland County.
“We understand that this is not a trial about DWSD or how to fix DWSD but the city’s plan imposes burdens that will have a significant impact on DWSD and DWSD is already in trouble and they have been for decades,” Quadrozzi said. “So to examine the effect that the city’s pla has and will have is important as to whether that plan can be confirmed.”
She objects to making suburban residents pay for Detroit’s obligations. “If the plan were to be confirmed it would force non Detroit residents … to fund the city’s retirement obligations,” she said.
4:24 p.m. First opening statements by telephone. Kristin Going, representing Wilmington Trust, a COPs contract administrator, is on the line. She only took two minutes.
4:05 p.m. Another attorney, another PowerPoint. Now Jonathan Wagner is arguing against the city’s Plan of Adjustment. He’s an attorney for the holders of the Certificates of Participation, the notes used in the 2005 deal to inject $1.5 billion into the city’s pension funds.
TITLE: The Plan Unfairly Discriminate Against the COPs Class.
On face of the plan, Pension Classes recover 59-60 %
On face of the plan, COPs class recover 0 to 10 %
City acknowledges that discrimination in excess of 50 percent is grossly disparate.
Level of discrimination is actually far greater.
3:55 p.m. Bond insurer FGIC’s attorney Alfredo Perez continues to make the case that some creditors in Detroit’s bankruptcy are getting unfair, undeserved treatment under the proposed debt restructuring plan.
FGIC insured the famed “COPs” deal, the certificates of participation issued in 2005 to fund pension debt.
“They’ve got a billion five of our cash, and we’re the bad guys. How could that be?” Perez said.
3:54 p.m. As the FGIC attorney continues to make his case to sell pieces of the collection at the Detroit Institute of Arts, Judge Rhodes interrupted him and asked, “What about libraries, would you sell them too?”
“I wouldn’t sell the libraries,” Perez said.
“They are, what, more valuable, more significant than art?” the judge asked.
“I don’t know what intrinsic value…”Perez started to answer.
“What is if it had really valuable books in it?” Rhodes asked.
“Then perhaps,” Perez said.
3:40 p.m. FGIC’s attorney is using a PowerPoint presentation to guide arguments. Here’s what the first slide says:
TITLE: Reasonableness of the DIA Settlement – Four Factors
1) What is the debtor’s probability of success in litigating the issues to be settled?
2) What difficulties, if any, would the debtor have in collecting any amounts that would be owed in the event of a successful litigation?
3) How complex are the issues being settled, and what expense, inconvenience and delay would necessarily result from litigating them, instead of settling?
4) Is the proposed settlement in the paramount interest of creditor, giving deference to the view of those creditors that would be adversely impacted by the settlement?
FGIC’s CEO, Timothy Travers authored this op-ed piece in the Detroit Free Press today, titled “Why we creditors are fighting Detroit’s bankruptcy plan.”
3:06 p.m. At the conclusion of his prepared statement, Syncora attorney Marc Kieselstein was questioned by Judge Rhodes who demanded to know what offer the bond insurer would accept from the city as a settlement on what it’s owed.
“Something that’s within shouting distance of what the retirees are getting,” Kieselstein said at first.
“I want a percentage and I want it now,” Judge Rhodes said.
After more exchanges, including Kieselstein first saying he would have to consult with his client, he finally said,” 75 cents.”
And Judge Rhodes asked him where that money would come from.
“Through a combination of all the initiatives I’ve talked about,” Kieselstein said.
“There’s the art,” Kieselstein continued. “You could sell one or two pieces. You could finance a few pieces and you could get us to that number pretty quickly.”
He also mentioned some kind of sharing in the revenue that could occur through revitalization of the city.
2:59 p.m. Syncora attorney calls the statement “the city can’t be forced to sell the art” a “red herring” in the case.
Marc Kieselstein has been making opening statements for more than two hours. He has challenged repeatedly how the city prepared its bankruptcy claim, including what work was done to determine the value of the collection at the Detroit Institute of Arts and spread such funds to creditors like bond insurer Syncora, to whom the city owes hundreds of millions of dollars.
2:50 p.m. Here is the text of a slide the Syncora attorney is using in his opening arguments in the bankruptcy trial to criticize the city’s Plan of Adjustment.
TITLE: PLAN IS NOT FAIR AND EQUITABLE
SUBTITLE: Plan fails to live up to “all that the creditors could reasonably expect under the circumstances.”
SLIDE TEXT Debtor has:
Failed to explore potential benefits to new tax policy;
Failed to explore monetizing art collection (or portion of art collection) before Grand Bargain;
Failed to explore monetizing art collection (or portion of art collection) after Grand Bargain;
Failed even to try to challenge alleged legal impediments to realizing art value.
2:30 p.m. Syncora’s attorney also showed video of conflicting deposition testimony as to whether the city, in preparing its Plan of Adjustment, did any analysis of what would happen if taxes were raised. One consultant said yes, Robert Cline did such an analysis. But Cline said no, he didn’t.
“We have asked ourselves a thousand times in recent weeks why the debtor left such a gaping hole in its confirmation case,” Kieselstein said, adding the city had the “mindset of using every short cut” and the city would have to “throw itself on the mercy of the court” during the confirmation hearing.
(Cline, incidentally, was the trial’s first witness. He appeared Aug. 18. Here is a summary of his testimony.)
2:20 p.m. In his arguments that the city did not meet its obligation to do a “best interest” test of the settlement’s effect on creditors, Syncora’s attorney wondered about the city’s lack of analysis of what would happen if the bankruptcy was dismissed.
As part of his argument, Kieselstein first played video from Emergency Manager Kevyn Orr’s deposition in which Orr described a dismissal analysis done by one of the city’s consultants, Kenneth Buckfire, of the Miller Buckfire firm. Then Kieselstein played Buckfire’s deposition during which he said he never did such an analysis.
“The debtor has no idea what would happen in dismissal,” Kieselstein said, adding the city’s attorneys “cannot do a stand-up analysis of the dismissal scenario from the podium. …
“The debtor has dropped a big mess on your doorstep.”
1:50 p.m. And we’re back!
The schedule for the afternoon, as we know it, is for Syncora attorney Marc Kieselstein to finish his opening remarks. He’ll be followed by Alfredo Perez for bond insurer Financial Guaranty Insurance Company. Then UAW attorney Peter DeChiara and Richard Mack for AFSCME Council 25 are scheduled.
Attorneys for Macomb, Oakland and Wayne counties – not necessarily in that order – will follow.
Will that take us to the 5 p.m. quit time or will we get a witness today?
12:37 p.m. We’re on lunch break until 1:50 p.m. but here’s some catching up I needed to do from the Detroit Institute of Arts’ attorney’s statement: Arthur O’Reilly previewed some of the arguments witnesses will make later in the trial relevant to the grand bargain and the protection of the museum’s collection from sale to pay creditors.
He described the museum’s relevance and importance to southeast Michigan – not just the city’s balance sheet – and said it has innovative programming to reach a large audience. O’Reilly also said, in his opinion, it is “one of the most accessible museums in the world.”
“Despite population decline (in the city), the museum in recent years has attracted as many as 600,000 visitors a year,” he said. “Any sale of the collection would actually put the museum in jeopardy.”
A few of O’Reilly’s points:
The “great preponderance” of art was donated to the museum, not the city, and were made with restrictions on their use. “It’s held in trust and the public is the beneficiary,” he said. “This museum deserves to stay right where it is.”
While the museum’s history dates back to the 19th century and the bulk of its collection was acquired through donations and purchases in the 20th century, the DIA’s importance in the 21st century endures. “The museum isn’t the glittering link to the history of the city” as creditors called it in some filings, O’Reilly said. “But it’s key to our present and our future.”
Selling the art would “chill philanthropic giving in a city that needs charitable giving more than ever.” O’Reilly referred to the judge’s bus tour that city attorneys arranged. (More about that here) “You went through various parts of town. Some were blight. Some were in various forms of decay,” he said. But the tour also included the DIA and visits to some of the galleries. And although Rhodes entered the museum from a back door, O’Reilly said he hoped the judge saw the motto etched above the museum’s Woodward Avenue entrance: “Dedicated to the people of Detroit for the knowledge and enjoyment of art”
“What would it mean if that statement of promise and ambition and hope were rendered a dead letter?” he (somewhat) rhetorically asked the judge. “What would charity mean if the creditors have their way?”
12:15 p.m. The Syncora attorney, Marc Kieselstein, continues to argue that the city has failed to justify its ‘unfair discrimination” in paying different creditor groups different amounts relative to what they were owed. (Syncora stands to lose hundreds of millions of dollars in the bankruptcy restructuring plan, which calls for paying pennies on the dollar for what the bond insurer is owed.)
The slide looks like this:
TITLE: Discrimination is Not Supported by a Reasonable Basis
SUBTITLE: Debtor’s Reply justified discrimination based on:
1: Employee morale
2: Settlement of eligibility litigation;
3: Pensioners’ inadequate ability to protect themselves;
4: The Grand Bargain proceeds are outside the Plan and shouldn’t be counted for discrimination purposes;
5: And discrimination is minimal when OPEB (health care) and pension claim recoveries are viewed in the aggregate.
Kieselstein said all of the above justifications for the discrimination fail to meet legal standards established in bankruptcy cases.
11:49 a.m. Syncora attorney Marc Kieselstein in his opening arguments reviewed what Emergency Manager Kevyn Orr said during his deposition about how decisions were made about what amounts to pay different creditor classes.
(He’s building a case that pensioners were treated much better than financial creditors and that such treatment is contrary to bankruptcy law.)
At his July deposition, Orr was questioned by another Syncora attorney, Stephen Hackney, about what rationale could exist for the discrimination against certain creditors of the city. Orr said they were: the human dimension, the city’s covenant with retirees, the potential invalidity of COPs, and assets in retirement systems.
“We all appreciate the human dimension, your Honor, but let’s remember the rule of law,” Kieselstein told Judge Rhodes. “The debtors’ decision to rely on the human dimension … is a legal nonstarter. That affects the whole legal discrimination analysis, it’s enough to sink the ship. It doesn’t matter what else the debtor says.”
In other words: while the human dimension may be a sympathetic argument, it has no place in bankruptcy and doesn’t exist in bankruptcy law, Kieselstein argued.
“Bankruptcy is the land of broken promises,” he said.
11:35 a.m. Syncora attorney Marc Kieselstein, who is from the Kirkland & Ellis firm in Chicago, told Judge Rhodes he is being “asked by faith alone to find that the debtor has met its many burdens” and urged him to look more closely at bankruptcy law in deciding whether to confirm the city’s Plan of Adjustment.
“This plan unfairly discriminates, fails the best interests tests and is not fair and equitable,” Kieselstein said.
Kieselstein took aim squarely at the “grand bargain,” specifically how it has potentially resulted in money for a single creditor class – the pensioners — and took the “asset” of the Detroit Institute of Arts collection of the bargaining table “for a relative song.”
Kieselstein said the city was enjoying the benefits of bankruptcy – automatic stays of payments, a “fresh start” – without adhering to certain principles of Chapter 9 filings.
“The plan provides vastly disparate treatment for creditors,” Kieselstein said. “It cannot be confirmed without doing serious harm to the rule of law.”
11:13 a.m. That concludes opening statements from the city and its supporters (at least for the purposes of the confirmation of the Plan of Adjutsmen): the Detroit Institute of Arts and the Official Committee of Retirees. Now we will have several attorneys representing creditors who oppose the city’s plan.
First up: Marc Kieselstein who represents bond insurer Syncora, a staunch opponent to the city’s plan. He starts by saying it has “epic levels of discrimination” and says “discovery has revealed the the debtor in many instance gave itself a hall pass from even having to develop basic evidence.”
11:06 a.m. Attorney Sam Alberts, of the Denton’s firm, represents the Official Committee of Retirees. (There’s a provision in bankruptcy law that provides for this committee that exists to protect the interests of all retirees. The committee has representatives from the various pensioner, employee and retiree groups.)
Alberts opened his statement with a review of the importance of the city’s workforce, saying many of them had bypassed higher wages in the private sector for the promise of the public sector benefits including pensions and health care. In some cases, he said, they literally sacrificed “life and limb.”
Alberts reviewed a few of the provisions in the Plan of Adjustment and how they affect pensioners. These include a 4.5 percent reduction to the general service retirees along with a loss of cost-of-living increases. Alberts said the cuts to those increases will save the city $700 million.
In addition, he said, “Thousands of these general service workers will have their pensions reduced further to cover alleged interest overpayments … to annuity savings funds. I say alleged because … these payment were determined without any of their input and were made with respect to contracts and city ordinance.”
Here’s some background on the “annuity clawback” that also will be addressed by individual pensioners Judge Rhodes will allow to testify during the trial.
Under the proposed Voluntary Employee Benefits Association, a replacement to city-funded health care, pensioners will assume a far greater share of their own medical insurance and direct costs. “As you get older, it’s a much more challenging request,” Albert said. “These retirees are more than just pensioners. They received a promise of valuable health care benefits going forward.”
10:45 a.m. Now up: Sam Alberts, who represents the Official Committee of Retirees.
(You can listen to Sam Alberts on WDET here.)
10:26 a.m. DIA attorney Arthur O’Reilly says his opening statement will focus on “respecting charitable donations and respecting the people’s right to arts and culture.”
10:20 a.m. First up to support the city in urging Judge Steven Rhodes to confirm the city’s Plan of Adjustment is Arthur O’Reilly, who represents the Detroit Institute of Arts. Some of the city’s creditors have had an intense focus on the value of the museum’s collection and advocated that it be sold to pay debts to ALL creditors, not just used as leverage to raise money for pensions, as the “Grand Bargain” did.
10:12 a.m. City attorney Bruce Bennett, of the Jones Day firm, concluded his three-hour opening statement. Throughout his time at the podium, Bennett asserted that the Plan of Adjustment was proposed in good faith, that the plan meets the “best interest of creditors” test under bankruptcy law, and that the plan discrimination against different classes of creditors is not unfair.
“We couldn’t do any better for the creditors. The numbers show that,” he told Judge Steven Rhodes.
As for the testimony that will come about the feasibility of the plan’s success, Bennett called it “an intensely and unavoidable factual determination.”
“There is not much law that is going to frame that discussion,” Bennett said. He described some of the conclusions the city’s expert witnesses will make about the feasibility of the Plan of Adjustment:
“The projections are sound. They were prepared by a team.” (Bennett showed a chart with witnesses on two sides: revenues and expenditures. The city’s CFO Jon Hill and Ernst & Young expert Gaurav Malhotra are at the top.)
“There’s also the reality that in the future, things will happen that we haven’t planned for. Unexpected things will most certainly happen, and other people, not necessarily the emergency manager and not necessarily the team that put this together are going to have to adjust to the future over time. We expect those adjustments. We expect those changes. They are impossible to predict and nail down,” Bennett said. “It is therefore important to remember while hearing the testimony that the focus is whether it’s more likely than not, more than a reasonable but a probable chance that everything that’s been put in place under the plan will achieve its intended result.”
Bennett says the city’s witnesses will say, “We think this is the city’s last best chance and that it’s going to work.”
In concluding his nearly three-hour statement, Bennett told the judge “Detroit has a better future after Chapter 9 … Detroit has earned this Court’s help in escaping from its current distressed state. … The Plan will succeed.”
9:25 a.m. City attorney Bruce Bennett is going through a chart titled “Pension Recovery Using Legally-Cognizable (sic) Standards” to show the judge, in part, a “lack of discrimination” in calculating the returns on pension investments. Feels like half the media covering trial have used the phrase “deep in the weeds” to describe the last half hour of courtroom “action.”
9:07 a.m. Some of Detroit’s best journalist are covering this trial. Follow them live at these blogs and Twitter feeds:
The Detroit Free Press live blog, where you can give a letter grade to the city’s opening statements.
Freep Reporters tweet at @MattHelms and @NathanBomey on Twitter
Detroit News Reporters tweet at @RobertSnell_DN and @ChristineFerretti_DN
WDIV’s Rod Meloni is blogging here.
8:55 a.m. Early in his statement today, city attorney Bruce Bennett referred back to the months immediately after the Chapter 9 case was filed and he described conversations with opposing counsel.
“For several months whenever I spoke to a creditor, that creditor said, ‘Detroit is in a very unfortunate, difficult economic situation but we should be paid 100 cents (on the dollar) and here are all the reasons we should be paid 100 cents,’” Bennett said. “Your Honor saw that played out in the courtroom.”
He summarized some of those legal maneuvers and arguments:
Retirees argued the Michigan Constitution protected pensions.
UTGO holders “said among other things that … we have a lien on certain revenues collected by the city.”
LTGO noteholders argued “they had a superior position.”
Bennett also challenged the notion that the case should be dismissed and sent to the state courts. He summarized the potential scenarios, relating back to the early disputes and assertions from creditors:
“There is no reason why all of that wouldn’t happen again. There is every reason to expect that all of that would happen again in state courts but with a very important difference: state court judges would not have the supremacy clause and ordering principles that happen under the U.S. Bankruptcy Code, in particular, that deal with all of the conflicts ad all of the priorities that are being asserted. Instead, you would have stat courts having to give credit to all of these laws, there being no federal law, reason not to, and then having to reconcile all of them.
“Whether there is a race to the courthouse, or courthouses, or a mob scene at the courthouse, there is not going to be a single line where everybody agrees what their rights are and settled for some treatment that arises out of a pro rata assessment where everyone expects it will be fully paid and the allocation scheme from which it occurs are not quite clear under the law. .. It’s a further demonstration that dismissal scenario is not good for creditors generally.”
8:30 a.m. Jones Day attorney Bruce Bennett is back at the podium for the city of Detroit.
He’s continuing his introductory statements in favor of the city’s Plan of Adjustment. Two other attorneys also plan to make opening statements in support of the restructuring plan: Arthur O’Reilly, who represents the Detroit Institute of Arts, and Sam Alberts, who represents the Official Committee of Retirees.
(You can listen to Sam Alberts on WDET here.)
Several creditor attorneys say they will counter the city and its supporters with opening statements objecting to the plan as it now stands. They’re expected to present some arguments about why Judge Steven Rhodes should not approve the Plan. They include lawyers for bond insurers Syncora and FGIC, as well as counsel for the UAW, AFSCME and Macomb, Oakland and Wayne counties.
The country’s largest municipal bankruptcy trial begins today in Detroit. WDET’s Sandra Svoboda is in the courthouse and will update this blog throughout the day…and continue doing so throughout the trial.
Here, she and WDET’s Pat Batcheller discuss what to expect during the trial, which is technically a “confirmation hearing” on the city’s Plan of Adjustment. Ultimately, the judge will determine if the city’s plan is feasible and reasonable to creditors.
4:54 City attorney Bruce Bennett has finished for the day. He says he have about another hour tomorrow morning. Attorneys for the Detroit Institute of Arts and the Official Committee of Retirees say they each will have about 30 minutes of arguments supporting the city.
Attorneys for creditors who object – including Syncora, FGC, the UAW, AFSCME and Macomb, Oakland and Wayne counties – will follow.
4:40 Bruce Bennett’s opening arguments in the Detroit bankruptcy case first reviewed why the Detroit Institute of Arts collection shouldn’t be sold to pay creditors. Now he’s moved on to a discussion of what additional revenues could be available. Read: taxes.
He’s currently discussing why no additional monies are available from property owners, residents or workers in the city.
“Raising taxes now is not compatible with the goal of saving the city,” Bennett said. “Raising taxes could cause the city or any municipality to go into a state of decline it can’t escape from.”
4:17 Opening arguments continue to focus on what started as “the DIA Settlement” that became the “Grand Bargain” when the state got involved, as described by city attorney Bruce Bennett.
Not only is the museum an asset, it’s one that could be used to help lure residents back to the city, Bennett argued. But he continues to insist the art, by law, does not need to be sold to pay debt.
“I don’t think any of the donors thought the art would be or could be sold to fill potholes, pay for the collection of garbage, or pay for any city services…” he said.
The donated art, he said, went to the DIA Corp., not the city.
3:58 The Grand Bargain is being outlined, specifically the transference of the art to a new nonprofit, and the legality of it. Attorney Bruce Bennett reviewed Michigan Attorney General Bill Schuette’s opinion (found here) related to whether the city needed to sell the art to pay creditors.
Bennett is now dismissing why a loan secured by the artwork is not a good idea. Creditors last week proposed such a plan.
He also says the conditions of the foundation money toward the grand bargain were keeping the art secure and the conditions attached to the state money included the prohibition on litigation. (Recall: pensioners waived their rights to sue the state related to emergency manager law or constitutional protection of pensions with their favorable vote on the city’s Plan of Adjustment.)
3:41 City attorney Bruce Bennett got right to addressing the issue of whether the collection at the Detroit Institute of Arts can be sold to pay creditors in the city’s bankruptcy case:
“An unsecured creditor doesn’t have a general claim against all property of a Michigan municipality. … What the objectors have done is cited basically five cases where the proposition that something about the “best-interest” test requires the use of city-owned assets to provide recovery. … We’ve just seen that there’s nothing in Michigan law that supports that conclusion or supports that argument. So what is it about Chapter 9, if anything, that expands the rights of an unsecured creditor in a bankruptcy? … the answer: nothing. There are, of course, provisions of Chapter 9 that reduce or limit creditors’ rights.”
3:33 More from Bruce Bennett’s opening arguments:
“We are here today finally to obtain that help and the purpose is no less than to save the city of Detroit. The city needs more net revenue than it has to provide adequate services and service legacy debs. … Detroit’s won’t survive if it isn’t done.
The proposed Plan of Adjustment eliminates $7 billion of the city’s $18 billion of debt and provides for $1.7 billion in investments over the next decade.
“The city believes the investment will be sufficient to address the city’s most pressing needs. … The city believes the planned investment will be sufficient to rehabilitate the city.”
3:30 City attorney Bruce Bennett began opening arguments at 3:20 p.m.. He started with listing some of the reasons for and results of the city’s bankruptcy: depopulation, blight, a deterioration of the quality of life.
“The city no longer has the resources to provide its residents with the basic services,” he said.
He called the city’s operations “wasteful and inefficient” and described “much of” the city’s police and fire equipment and technology as “obsolete.”
The Chapter 9 reorganization, Bennett said, can help reverse the decline, attract new residents and businesses and “reinvigorate” Detroit.
“The city needs help,” he said. “During the roughly past year, progress has been made.”
3:15 Judge Rhodes denies all of the motions except the one seeking to prevent the testimony of city attorney Evan Miller.
The Court is on break until 2:10 p.m. when Judge Rhodes will hear one more pretrial motion and issue his decision on all of the other ones argued today. Then opening arguments will start.
UAW attorney Peter DeChiara says Miller “is THE most knowledge person” on pensions and benefits and how the bankruptcy might affect the pensions and health care benefits for the Detroit Public Library. “We do not seek privileged information from him,” DeChiara said.
(The UAW represents library employees and is seeking to determine the library’s long-term obligations to pension and benefits funding.)
“It’s not the lawyer’s’ job to testify in support of the plan,” Judge Rhodes told him.
“I agree with you in general, however in this case, the individual who represents the city and has the knowledge to answer the questions that are relevant to the UAW’s case happens to be with Jones Day,” DeChiara said.
12:19 Judge Rhodes asks who else wants to be heard on any of the pretrial motions.
First, Robert Gordon, attorney for the city’s retirement system, said the city was able to assess the impact of the plan on retirees.
Barbara Patek, attorney for the Detroit Police Officers Association, used the phrase “business justification” for plan confirmation, though she was addressing the human dimension of bankruptcy and its affect on pensioners and employees. Neither she nor the judge could come up with a better term than “business justification.” Patek said because this is a municipal bankruptcy case, assets cannot just be divvied up – city services need to continue.
11:54 FGIC Attorney Ed Soto is now arguing that the city should not be allowed to present testimony and evidence about the validity of the $1.4 billion pension funding deal from 2005, also known as the Certificates of Participation claims. Here is the motion filed on the issue.
(For background, a succinct history of the COPs deal — and a description of some of the surrounding legal issues — can be found here. The city has a pending lawsuit challenging the legality of the COPs deal.)
Soto also argued the city should not be allowed to present evidence that would show the potential hardships that would be suffered by pensioners. Here is the motion on that issue. A few months ago, Judge Steven Rhodes declined to allow Syncora access to information about individual pensioners’ financial information and assets.
11:32 Ed Soto, an attorney for bond insurer Financial Guaranty Insurance Company is critical of the court’s mediation order, claiming it has been too broadly interpreted and has prevented discovery by creditors in pre-trial preparations.
Syncora originally challenged the order in this motion, which the judge is being asked to rule on today in advance of the trial.
The court’s mediation order has been unsuccessfully challenged by some creditors, including FGIC and Syncora, who wanted documents and witness testimony about how they grand bargain came about. They were unable to get it because the mediation order (ensuring confidentiality related to the negotiations) prevented their release.
Soto described how Rip Rapson and Dan Gilbert have given contradictory statements — both publicly and in depositions — and creditors’ attorneys could not question them about the discrepancies because of the mediation order. Rapson is the president of the Kresge Foundation, a donor to the grand bargain, while Gilbert is chairman and founder of Rock Ventures and Quicken Loans.
Soto contended the lack of discovery prejudiced some parties as they attempted to prepare for trial and argue that the city’s PLan of Adjustment unfairly discriminates against some creditors, which could be grounds for the judge to reject its confirmation. “No one group should be allowed to benefit from (the mediation order),” Soto said. “These are issues that have handicapped us.”
“Your argument assumes that the reasonableness of some other plan is before the court, it’s not,” Judge Rhodes said at one point.
“My argument goes to whether there is sufficient discovery that would allow evidence that but for this money going toward the pensioners, (the grand bargain) would not have happened,” Soto said.
Syncora attorney Stephen Hackney called it a “fundamental due process order” and argued for the mediation order to be lifted.
In response, city attorney Greg Shumaker said Emergency Manager Kevyn Orr would testify about what came out of the mediation, specifically the grand bargain, not what happened in the mediations or what was said to the foundations during the process. Shumaker said, contrary to what Syncora and FGIC attorneys said, the city is not selectively using the mediation privilege.
10:59 Internet Service Interruption in the Media Room….but here’s what’s been happening:
Stephen Hackney, attorney for bond insurer Syncora, is arguing a motion previously filed that would preclude the city from introducing evidence related to how much less pensioners would receive if the “grand bargain” funding was not included. The grand bargain is the agreement to bring $660 million of state, private, foundation and corporate money to pension funds so that retirees suffer smaller cuts to their monthly payments. “These are recoveries under the Plan,” Hackney says.
Syncora stands to lose hundreds of millions of dollars in the bankruptcy case, as the Plan of Adjustment now stands. The Bermuda-based company’s attorneys have consistently argued that they are experiencing “unfair discrimination” under the plan, in part, because the grand bargain monies only benefit pensioners, not financial creditors. Syncora also wants Detroit Institute of Arts’ holdings to be sold to pay creditors.
City attorney Greg Shumaker. of Jones Day, is reviewing the state contribution agreement ($98 million to the General Retirement System and $96 million to Police and Fire Retirement System) and making other legal arguments related to procedure and what will be introduced.
“It’s really tough to tell what Syncora wants to prevent the city from putting on,” he says. “It’ a legal issue but in fact, there’s no doubt that there’s a lot of evidence that’s going to be put on related to the grand bargain. … ”
10:38 The city is represented by several attorneys who are up front in the courtroom today. Among them (linked to their bios):
10:30 While the attorneys are still dealing with pre-trial issues, here are a few live blogs to follow. They’re all done by reporters who have been here for the duration of the case. (Let’s just say there are a lot of new faces in and around the media room today)
10:27 Tweeting from court today (going counterclockwise around the media room) are @WDETSandra, @NathanBomey, @MattHelms, @ChadLivengood, @CharlieLangton. @RobertSnell and @RoopRajFox2 are elsewhere in the federal courthouse.
10:05 Attorneys for the city and creditors are discussing witnesses, exhibits and other items related to procedures at trial, which will begin later today. Most witnesses will be sequestered.
8:30 a.m. For more than an hour, Judge Steven Rhodes heard arguments for and against issuing a temporary restraining order that would halt water shutoffs in the city. A summary is here.
Judge Steven Rhodes today approved the city’s plan to refinance $1.5 billion of its water department debt.
Earlier this month, the city announced a tentative agreement with creditors for the Detroit Water and Sewerage Department. The deal would allow for the refinancing of long-term debt because the city would buy back and then re-issue bonds. Since then, several bondholders have accepted the new terms. About $1.5 billion worth of water department debt will be re-financed at a lower interest rate under the plan.
Emergency Manager Kevyn Orr testified today that the deal saves the water department more than $ 11 million annually on debt service for about two decades. It also means several creditors will no longer object to the city’s financial restructuring plan because their bonds are not impaired as part of the settlement, which will help confirmation of the city’s Plan of Adjustment when the trial begins Sept. 2.
Here’s a timeline of how the DWSD deal unfolded:
Aug. 6: The Detroit Water and Sewerage Department approved a deal to allow the re-financing of about $5.2 billion in debt. After weeks of confidential mediation sessions, the city and its water department bond holders and insurers reached the agreement. It allows the city to buy back existing bonds and then re-sell them at a lower rate to pay off old debt. Commissioners for the Detroit Water and Sewerage Department say the deal will save customers money and reduce some operating costs for the department.
More on that announcement here.
Aug. 12: The Michigan Finance Authority passed a resolution approving financing for the bonds if the tender went through.
Aug. 13: The Detroit Board of Water Commissioners authorized the terms of the new funding for bonds.
Aug. 14: Detroit’s Emergency Manager Kevyn Orr issued an order that ratified the Board of Water Commissioners resolutions. The Detroit City Council approved the re-financing deal.
Aug. 19: The Michigan Department of Treasury authorized the bonds.
Aug. 22: The Detroit Board of Water Commissioners accepted the bonds that had been tendered. The Emergency Manager approved and ratified the board’s order.
Late last night, the city filed its seventh version of its Plan of Adjustment, the blueprint of how it wants to restructure debt and city services as part of its bankruptcy case. Here it is with this correction:
We dubbed it the “BIKE-ruptcy” tour.
Following the route as best we could that was taken by Bankruptcy Judge Steven Rhodes on his bus tour last week, Todd Scott and I rode more than 50 miles through Detroit on Saturday. Todd, the executive director of the Detroit Greenways Coalition, has probably logged more miles on the city’s streets than anyone and has a keen understanding of how non-motorized transportation can help connect people and neighborhoods.
From the perspective of our bike seats, we wanted to see what the judge saw and we wanted to be closer to it than he was to see if it changed how we thought about it. We wanted to take a slower roll through the city and better experience the neighborhoods than we do from our cars. We wanted to see what opportunities there are to meet people when you’re not caged behind the glass windshield of a car (or bus, of course…), and we wanted to see just what understanding about the city the judge’s entire route may have given him, the city attorneys, the creditors’ lawyers and the others on board.
Using the map handed out to media by the city attorneys, the tour was heavy on residential neighborhoods, mainly areas with single-family homes. We thought the blocks the tour organizers picked were extreme: some middle-class areas more densely populated than other comparable places in the city; some more decimated or vacant as well. Palmer Woods is clearly the best of the best in the city.
The route was light on commercial areas, with virtually no industrial sites. Little urban agriculture was in view, and few parks or gardens appeared. We didn’t ever see the Detroit River or witness the potential of some of its adjacent neighborhoods.
The bus traveled dozens of miles on freeways – we had to ride alternative routes, of course. Judge Rhodes was extremely concerned about secrecy and security, keeping the day, time and location of his route a secret from media until after it happened. We had little fear of a competing Detroit media cycling tour, and the most danger we faced was traffic on Eight Mile Road. That is NOT a street designed for anything but high-speed car and truck traffic so it was a little hairy at times pedaling next to high-speed cars. Why not ride the sidewalk? Well, first of all, in Michigan cyclists have a right to share the road. Second, the condition of the sidewalk pavement is often much worse than the roadways.
(Todd points out Eight Mile and Gratiot Avenue, our other most dangerous road, are both state roads and not the responsibility of the city…)
Along our 50-plus-mile route, we met some nice people, got invited to church, posed with a horse from the Detroit Police Department mounted unit, and wrapped up our tour with the most creative, exciting, historical and cultural site we’ve ever ridden.
We rolled into Rivera Court at the Detroit Institute of Arts, bikes and all.
Here’s a transcript of a conversation we had about what we saw. It’s airing on WDET 101.9FM today.
Todd Scott: So the route began in Brightmoor. We went through the west side. Then we came back north up through the University District and through Palmer Woods.
Sandra Svoboda: That part was really nice and residential. Then we went through the parking lot of the new Meijer’s at Woodward and Eight Mile and we had that long eight miles into the wind along Eight Mile and then we took Gratiot back into the city. A little job through the Heidelberg Project, through the downtown and by the Detroit Institute of Arts.
TS: I feel the judge saw a pretty accurate view of the city in terms of the positive and the negatives and how it rapidly changes between both of them.
SS: Let’s remember the tour was not designed as a bike tour. This was really for the judge, of course, to give him context for what he’s going to be hearing in the city’s bankruptcy trial on the Plan of Adjustment that restructures the debt and the city services. So the attorneys had asked him to go along and really get some kind of idea of what’s out in the city. I kept thinking as we were going along that really, again, we had time to think about it because we were on bicycles and not zooming through on the bus. But I feel like there were some really positive signs about city services. We saw some police out on patrol, the fire stations were well taken care of. We couldn’t judge the lights because we were there in daylight.
TS: That’s correct. The residential garbage collection seemed to be working. We did see some dumping in some areas and there were some road conditions that could have been improved especially some that needed some street sweeping.
SS: Again, I think the focus of the judge seemed to be on residential and we saw some extremes in that regard. We saw some beautiful houses, well-maintained in Palmer Woods. We saw some middle class neighborhoods that seemed to be occupied. But we also saw some really blighted areas that were probably more extreme than the norm in the city where there’s one house missing or a couple burned out. Some of those blocks were really, really vacated I’m sure that made an impression for the judge.
TS: I’m sure it did. We also saw a few business districts. Some that were operating really well and some that needed a little love. We really didn’t go through any industrial areas though. That was an oversight.
SS: Yeah, that was missing. I feel like the judge, he was in a bus, and they made a couple of stops abut they didn’t have a chance to interact with residents like we did. When you’re in a bike seat and people are saying hello, and you can hear their dogs barking and you can hear the lawn mowers going, it certainly gives you a different impression about the vibrancy of the city.
TS: Absolutely we got to wave to people and get out and stop and talk to folks and find out what’s really going on.
SS: We had a similar conclusion as the judge. We did not finish going up the Lodge Freeway. I should point out that we skipped I-96 of course because we can’t take bicycles on that. It was dangerous enough on Eight Mile. But we finished at the Detroit Institute of Arts. This has been a huge part of this bankruptcy case that I’ve written about and covered in terms of the creditors asking that the art get sold to pay debt. I thought it was a good finale for our tour.
TS: It was great.
SS: Thanks to the DIA for letting us in there.
TS: I’ve ridden in many different places but that was quite unique. We were both staking claims to being the first people to ride in the DIA which is something we’ll check off on our bucket
SS: Nothing I’ve done in my reporting career before.
Bankruptcy Judge Steven Rhodes and a handful of attorneys today took bus tour of Detroit to see conditions in the city’s neighborhoods. Lawyers for the city arranged the tour, and they say it will help the judge understand what he’s ruling on during the bankruptcy trial that starts in less than two weeks.
The 58-mile tour started in Brightmoor, went southeast to the Dexter Davison neighborhood, moved through the University district, drove past the new Meijer’s on Eight Mile and then headed to the city’s east side. The bus drove through the Heidelberg Project and Eastern Market, up Woodward Avenue where the M-1 rail line will run and finally to the Detroit Institute of Arts.
Three city attorneys were on board the bus, along with lawyers for three financial creditors and Oakland County. The judge, who did not ask questions, had two staff members with him taking notes.
Passengers got off the bus twice, once at a police precinct and again at the D-I-A where they viewed the Diego Rivera murals and a Van Gogh painting.
City attorneys say the tour included the good, the bad and the ugly in Detroit. They call the tour “eye-opening” and say it should help the judge understand what his decisions during the trial will mean to residents and businesses in the city.
“It was important in our minds for the judge to get context of the evidence that he was going to hear and by going on the tour and seeing the different sites, we believe it provided the context necessary for us to present our case,” says Robert Hertzberg, an attorney for the city.