Detroit Emergency Manager Kevyn Orr returns to the witness stand in the city’s bankruptcy trial today, and according to city attorneys, he could testify most of the day. We’ll have updates here with highlights of this testimony. Here’s what he said yesterday.
Court is in recess until tomorrow, when Orr will return to the stand. Roger Penske is also expected to testify.
Attorney Ed Soto, who represents bond insurer Financial Guaranty Insurance Company, is first to cross examine Orr. FGIC, with roughly $1.1 billion in claims, is the largest creditor without a settlement with the city. The Plan of Adjustment calls for paying them roughly 6 cents on the dollar.
Soto began by asking questions about the city’s different treatment of classes of creditors in the Plan of Adjustment, specifically that pensioners lose less than financial creditors like FGIC.
After a short cross examination, Kresge CEO Rip Rapson is finished testifying. Creditors attorneys now will cross examine Kevyn Orr.
Because of scheduling issues, creditors’ attorneys postponed cross examining Kevyn Orr this afternoon, and Rip Rapson, the chief executive of the Kresge Foundation, is on the witness stand.
Kresge, he said, has invested about $1.4 billion in Detroit in grants and direct funding for programs, personnel and projects including the Detroit Future City planning initiative. That commitment will continue. Kresge has pledged $100 million toward the “Grand Bargain” that funds pensions and protects the collection at the Detroit Institute of Arts from sale.
City attorney Greg Shumaker questioned Rapson about why the foundation officials believed the DIA was worth such an investment.
“Its’ one of those defining institutions of Detroit life,” he said. “The contribution to the grand bargain is above and beyond what we would normally spend.”
Detroit City Council members are not calling Orr as much as they used to, he quipped during his testimony. But he described positive working relationships with them.
“With most of the council member I’d like to think it’s quite good and personable,” he said.
He also repeated his earlier testimony describing a good relationship with Mayor Mike Duggan, including talking about what would happen when Orr’s tenure is up.
“We had a long series of discussions about transition. Frankly for the last nine months he’s supported me on restructuring side and I’d like to think that I’ve supported him with operations,” Orr said of Duggan.
“Why not sell the city’s assets and increase creditors’ recovery?” city attorney Greg Shumaker asked Orr when court resumed after a lunch break.
“For several reasons. I believe that under the statute, both the state (emergency manager) statute and the federal law, I’m not required to sell assets. We leased assets: Belle Isle, which required approval, and we have liened assets for financing, which requires approval. But we haven’t sold anything. I believe for the city come back, it needs the assets that it has. It’s not as if the city has a great number. Some are notable, the DIA for example, but I believe we’ll need those assets, particularly the DIA, as it’s one of the most important cultural institutions in the city,” Orr said.
Shumaker asked what could be sold.
Orr answered: 380 parks, the Detroit Zoo, the Michigan Science Center, four golf courses, a cemetery. “But we haven’t sold any of those,” Orr said.
Orr said the Plan of Adjustment seeks to improve city services simply to reach acceptable levels in national standards. “We are not trying to reach gold-plated service levels,” he testified.
Provisions of the $1.7 billion provided over the next decade to improve infrastructure and city services will be focused on updating and improving procedures and systems to save money but also to make “compliance” easier. For example, Orr described how he saw people waiting four hours to pay tax bills. “When you have a barrier to compliance like that, that means you’re going to get noncompliance,” he said, meaning people won’t wait that long to pay bills.
“You want to put out restructuring initiatives that help people comply if they want to. You want them to get fair service for their taxes,” he said. “You want to make sure the city works in an adequate way, the way it should, in a way they’re expecting so that they themselves are willing to comply.”
Part of Orr’s testimony covered a mini comparison of pensioners and financial creditors and how they were treated in the Plan of Adjustment — how their claims were reduced — and how Orr concluded, partially, how much they should be reduced.
“When I look at the expectations of the relative parties, I’m well aware that financial creditors have processes, procedures, due diligence, underwriting, analysis, access to ratings agency reports and property reports relative to debt issuance and have a better capacity to handle the risk … as opposed to the average individual or work of the city,” Orr said.
City attorney Greg Shumaker asked why it was important to understand that dynamic.
“You’re trying to understand or at least trying to balance competing interest as best you can,” Orr said. “No one said there was an unlimited pot of money. Everybody agreed had limited assets to pay these obligations.”
But he said he balanced what “access” to information about risk, interest rates and other “costs” related to debt different parties had. Sophisticated financial creditors had more. Pensioners had less.
“The average worker doesn’t have that ability to price the cost and the risk or build into their instrument certain recoveries as those risks rise up. The average worker just expects to be paid,” he said. “They were going to receive their pensions. That’s what the city had promised, that’s what the system had promised, that’s what the state constitution had promised. Many of them had no reason to believe that was not going to occur and they had planned their affairs on that basis.
Shumaker asked Orr how pensioners viewed the city’s pension obligations.
“They felt very strongly they had to be protected and observed,” he said.
The Syncora settlement, which came just last month, was significant Orr said. The deal reduces by about three-quarters the Bermuda-based bond insurer’s roughly $400 million. It also, Orr testified, negates several Syncora legal actions and suits related to the Detroit bankruptcy that eventually could have cost the city up to $10 million.
“It was costing the city not an insignificant sum of money to defend those claims from that litigation,” Orr said. “I expected them to go, on appeal, all the way up to the Supreme Court. I expected it to go on for years.”
The settlement involves a cash payment, some city property, a parking garage and an extension of the lease for a Syncora subsidiary for the Detroit Windsor Tunnel.
The development agreement, which is part of the settlement, gives Syncora 15 months to develop several parcels of property along East Jefferson near the Detroit River, and construction needs to be completed within three years.
“It has an option for Syncora, and this can change, to have access for certain option prices for certain pieces of property along the East Jefferson-River corridor,” Orr said. He expects parking and residential development there.
Syncora also would spend $13.5 million to develop the Grand Circus Park parking site. After recovering that cost of capital improvements to the garage, Syncora would pay the city 25 percent of its parking revenues.
Orr said Syncora has experience operating “subterranean” sites, such as the tunnel, so it made sense for the city to allow them to acquire and operate an underground parking garage.
Before the morning recess, Judge Steven Rhodes announced how much time each side has left to make its case in the Plan of Adjustment confirmation trial.
The city has 31 hours and 45 minutes. The objecting parties have 54 hours 3 minutes.
The amounts represent reductions of 4 hours for the city and 10 hours for creditors, possible because of settlements reached since the trial started.
“The court has observed that both sides have been very crisp and efficient in presenting their case, which the court appreciates,” Rhodes noted.
Orr testified there were practical, legal, economic and symbolic reasons to have certain classes of creditors support the Plan of Adjustment.
Having the city’s pensioners vote in favor of the Plan of Adjustment, he said, was important in part to avoid a “cramdown” scenario in which the bankruptcy court judge could “force” the plan through and, in part, to make it easier to confirm it.
“It was also important to get buy-in from the pension and the retiree health care class because as I said before, we were trying to develop a consensual plan here in the city. The city has had enough kind of conflict and strife. When we, meaning the restructuring team, leave, we’d like to leave the city in a position that parties believe they had a voice in this process,” he said, “and there’s buy-in going forward.”
Here’s more on the “Grand Bargain,” from Orr who is on the witness stand and revealed a bit about Lansing politics…and a lack of faith in the future.
The state contribution to pension funds was proposed by Gov. Rick Snyder early in the year, originally for $17.5 million payments annually for 20 years. But Orr said that proposal was revised to a one-time, $195 million payment before the Michigan Legislature passed the package of bills in June.
That way, he testified, future politicians can’t change it.
“It evolved to a net present value funding mechanism where the state would fund a lump sum on the front end and would be factored out,” Orr said.
Part of Orr’s strategy in forming the terms in the Plan of Adjustment is to “get the city out of the debt business,” he said.
That’s why the plan, which describes how Detroit will restructure its finances and city services – if it’s approved by bankruptcy Judge Steven Rhodes – puts in place funding for the city to operate and pay debt for 10 years without seeking additional financing.
“We’re trying to keep the city out of the capital market for a decade,” Orr said.
His statements came during his testimony related to the issue of the city-owned artwork in the Detroit Institute of Arts collection. City attorney Greg Shumaker, of the Jones Day law firm, was questioning Orr about whether he had considered pledging the museum’s assets as collateral for any loans to raise funds for the city.
Orr had not, choosing to protect the artwork.
“When you pledge any collateral as debt, there’s a risk it will be seized,” he said.
Orr is testifying about the “Grand Bargain,” the deal that brings foundation and state money to the pension funds in exchange for not selling the collection at the Detroit Institute of Arts to raise money to pay creditors. The agreement also prevents some litigation against the city or state related to the reduction of pensions in the bankruptcy case or challenging the emergency manager law.
In valuing the Grand Bargain, Orr is using the $816 million figure, which is what it’s worth over 20 years. The present day amount is $661 million.
The DIA, the board of the foundation and the Michigan Attorney General disputed creditors’ claims that art could and should be sold to raise money for financial creditors. “There were other parties in the museum community who had voiced their opposition to any plans to sell the art,” Orr said.
DIA officials made clear to Orr that they would legally defend every single piece of art in the museum from forced sale, he said, noting some “high net worth individuals” would support the effort.
“I had every reason to believe their intent was sincere and they had the means to carry it out,” Orr said. “I think it’s fair to say it would be lengthy and intense litigation.”
Orr’s testimony resumed with a discussion of the city’s settlement with bond insurers of the Limited Tax General Obligation bonds, Ambac Assurance Co. and BlackRock to reduce the $164 million they were owed. Here’s what we reported when the deal was announced.
The settlement includes a 34 percent payout on the insurers claims, Orr said. The bond insurers, as part of the deal, agreed to support the city’s Plan of Adjustment and release their proof of claims and pending litigation.
Orr also gave a short lesson in municipal finance, explaining the difference between Unlimited and Limited Tax General Obligation bonds (UTGOs and LTGOs). The UTGOs may be backed by a higher amount of tax revenue, and municipalities are able to raise tax or millage rates to pay them. “LTGO has a limit on the amount you can raise to service the bond debt,” Orr said.
In legal filings against the city’s effort to reduce their payments, the UTGO bond insurers argued that they were entitled to special liens and equity lines, Orr testified. “The LTGOs tried to draft a little bit in their papers on the UTGO theory,” Orr said. “But it wasn’t as strong.
Following that, Orr described how the city addressed its obligation for retiree health care, the “largest unsecured portion of debt obligation the city had,” he said. “”We had no money reserved for these liabilities.”
In June 2013, the city estimated its “OPEB” liabilities — Other Post-Employment Benefits, which includes health care, vision, dental and death benefits for retirees — at between $5 billion and $5.7 billion.
“Being the single largest portion of unsecured claims, even at the lower number the retiree committee actuaries focused on, that would have been a significant liability for the city, and there was a risk it would continue to grow so it would have made trying to propose a plan at least for the initial 10 years, very troubling,” Orr said.
That estimated changed to $3.8 billion after the city and attorneys for pensioners and employees negotiated.
Orr said he couldn’t give details of all the discussions because of the continuing gag order preventing release of information from mediation in the bankruptcy case. But he said the parties shared data, reviewed interest rates and information from three different actuarial firms. The city, the Official Committee of Retirees and the pension systems each hired their own actuarial firms to vet data points including the number of retirees, actuarial projections about future costs and other financial forecasting.
“There was a number of information floating between” the three firms, Orr said. “We were going back and forth with data, based on the amount of claims, mortality rates, things like that,” Orr said.
Ultimately they settled on the city providing a $450 million note and the formation of Voluntary Employee Benefit Associations, which would handle retiree medical benefits.
“The city would be getting out of the health care business,” Orr said.
WDET’s Laura Weber Davis and Sandra Svoboda — along with callers — forecast what the new city governance arrangement means for the city and the bankruptcy case.
With his 18-month term set to expire this week, Detroit Emergency Manager Kevyn Orr has signed an agreement to transfer the vast majority of his control over government to the Mayor and City Council.
But Detroit remains in a financial emergency and Orr is still the Emergency Manager overseeing the city’s ongoing bankruptcy proceedings until his plan to exit Chapter 9 is implemented.
WDET’s Quinn Klinefelter sat down with Orr for an exclusive exit interview — that really is not an exit interview…Here it is:
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.
Detroit Emergency Manager Kevyn Orr’s tenure could end Sept. 27, according to state law, because after that date, the city council can vote to remove him. But City Councilman George Cushingberry told Bloomberg News there is a deal to keep him while the city’s bankruptcy case progresses. It’s a result of negotiations between Orr, Mayor Mike Duggan and Gov. Rick Snyder.
Details of the deal are “fluid,” though an announcement may come this week, said Orr’s spokesman, Bill Nowling. He said it’s assumed the council would remove Orr as emergency manager.
“We’re still working out the transition details with the mayor,” Nowling said.
Cushingberry said it’s unclear whether the council first would remove Orr from office or merely convert his status with a new contract that would end his role as emergency manager after the bankruptcy. Cushingberry said he anticipated the case would end next month.
Snyder wouldn’t divulge details of any agreement.
“We’re focused on helping ensure the city can exit bankruptcy as smoothly and quickly as possible, as that’s in the best interests of both Detroiters and Michiganders,” Snyder’s spokeswoman, Sara Wurfel, said in an e-mail. “We are talking and working cooperatively with the city — both mayor and council — to see how that can be best achieved.”in Kevyn Orr
It was Syncora’s “Alternative Universe” argument.
An attorney for the bond insurer asked Judge Steven Rhodes to consider the Detroit bankruptcy case from the perspective of the financial creditor in a creative nine-minute narrative on Monday that was part of a bigger hearing.
Part Mad Libs, part legal strategy, part emotional appeal, Syncora attorney Stephen Hackney essentially replaced “pensioners” with “bondholders” as he attempted to demonstrate how some of the dynamics of the historic bankruptcy case would have played out if the parties who would benefit from some of the settlements were changed.
Syncora stands to lose hundreds of millions of dollars as the city’s Plan of Adjustment now stands and has objected at seemingly every step of the proceedings to date. The company’s recent filing objecting to the plan attacks the negotiations related to the “Grand Bargain” and criticizes the mediators for some of their actions and public statements. Following that filing, the city asked the judge to strike it from the record and to sanction Hackney and his partners. On Monday, attorneys for the two sides argued in front of Rhodes who said he would rule before trial starts Sept. 2.
The court released the audio today, and we transcribed part of it. Click on the underlined names, terms or phrases for explanation and context.
What I was thinking about your Honor, is the problem when you are a hated minority is that there can be bias that creeps into the system, and as I was preparing for this argument I was thinking about John Rawls and what he said about the “veil of ignorance” and how you can use the “veil of ignorance” to try and assist yourself as a policymaker to make sure that you don’t know who is who when you come to any particular circumstance and you make the decision about the fairness or rightness of something blind to who you are in the scenario and I was thinking how can I convey to Judge Rhodes, how can I put the “veil of ignorance” on him to decide this motion as if it weren’t once again hated Syncora, the obstructionist, Mr. Cullen (an attorney for the city who used this phrasing in an earlier argument) says we have a gun to the city’s head. How can I help him do that? So what I would like to do and I will not take forever to do this but I would ask you to hear me briefly on this, which is consider the following alternative universe which is:
The city of Detroit files for bankruptcy and a mediation team is appointed and while one of the members of the mediation team, his wife does sit on the board of the DIA or did, she’s a director emerita, the chief mediator tells everyone that that individual will be mediating issues relating to the invalidity of the COPs and everyone goes on from there.
Now Ms. Neville and Mr. Gordon who are fierce advocates on behalf of the retirees who I’ve gotten to know through this case and have done a great job for their clients, they are certainly concerned about what is going on in connection with this, but they are, you know, representing their own clients and trying to do the best that they can do for them. So they move on.
What happens next, your Honor, is you begin to hear some rumblings about the fact that there is some deal out there involving the art that will ultimately bring money into the city, and you aren’t sure about what exactly, how this is coming about. You aren’t sure exactly what he structure of it is and you won’t be for months and months and months, but you hear people saying things like “It’s important for it to protect the city’s credit rating which is the lifeblood of the city.” And as matters proceed very quickly from rumblings in mid December to in mid January an announcement that there will be contributions by foundations that are designed to protect the credit rating of the city which is the lifeblood of the city.
And there is an announcement that the monies will go solely to the city’s bondholders. They will not go at all to the retirees, and there are statements by people to the effect of “the retirees, those legacy costs, they were 80 percent of the problem that put this city into bankruptcy. They caused it. The unions broke this city. We shouldn’t punish the financial creditors for the fact that they got caught up in a fight between Detroit and its own unions. It’s not their fault. We have to protect the credit rating of the city. We need to get money for this art. This is a great thing.”
Now, the retirees’ lawyers who are fierce advocates are absolutely appalled by what they are seeing. They’re also confused. They don’t know how the transaction came about. They don’t know who decided that the money would all go to one particular creditor and not to another, and they are very concerned. So what they want to do is they want to set out and take discovery and find out what happened on this. But there’s a bigger problem. And the bigger problem is that the city and the mediators, whoever it was that decided to make that public announcement that the grand bargain funds would come in and that they would all go solely to the bondholders, they made the announcement before they actually got the bondholders to say that that would be sufficient. No indenture trustee. No monoline insurer actually came in and said, “yeah, if you give us everything that relates to the art, we’ll take that and we’ll be done.”
They never say that so what happens is as the mediation team and the city front run this by announcing this, they hand the keys of the bankruptcy over to the bondholders, and the bondholders now realize the city is on record saying two things: “I am absolutely essential to the future of the city, and the charitable foundations are insisting not only that I get all of the money but also that I approve the plan.”
What Ms. Neville and Mr. Gordon see before they’re able to take any discovery or figure out what is going on, is they see a sequence of events where not only do the bondholders get all of the amount of the money from the Grand Bargain, but when there’s an additional $200 million settlement and 74 cents on the dollar or whatever the approximate amount of that was, the 26 cents that was leftover goes to the bondholders. When the Obama Administration makes $100 million in blight fees available to the city, blight amounts don’t go up by $100 million, it’s part of an improved deal for the bondholders. When there is a DWSD transaction and they agree that over the next nine years the DWSD will make substantial payments to the bondholders, they seek to invalidate the pensions under the theory that the pensions were obtained by corrupt means because of the fact that the unions had always controlled Detroit, there was no good arm’s length negotiation and so they ought to invalidate those things, they told the bondholders you’ll get 65 percent of the reserve they’ve set up to litigate that claim.
With all this in hand, now that they do have profound recoveries in the case by any standard, now the bondholders come in and approve the deal.
Now, Ms. Neville wants to pick up her pen and write an objection but she can’t because she has an aneurysm and is taken to the hospital because she is absolutely infuriated about what’s happened here. So what she does, she doesn’t know how this has come together. She’s seen it all play out in front of her, and it doesn’t feel right to her. She begins to try and take discovery. She is stopped at every stage in the process.
She tries to find out what happened on the charitable foundation side. She can’t. She tries to find out from Kevyn Orr, “what happened with what you were thinking?” And he very solemnly tells her, “even though there have been many published statements in the press about this particular deal, oh, I’m sorry. Now I can’t say anything with respect to that.”
Now at the same time that she’s getting blocked at every turn, trying to develop this evidence, she is watching something else unfold in public, which is the chief mediator is lobbying the legislature to pass the needed legislation to get the deal. He’s holding press conferences, and in the press conferences he’s saying things like, “We need to remember that this Grand Bargain, what it’s really about and what it’s really about is Detroit’s financial creditors, The bondholders who have built our hospitals and our sewer system and kept our city running for so long. That’s what this is really about.”
And he turns to a group of people at the DIA and he says “And I’d like to recognize one of the heroes of this bankruptcy and that hero is Claude LeBlanc. He’s the chief restructuring officer of Syncora, and I want us all to stand up and applaud Claude LeBlanc as one of the heroes of the bankruptcy.” And he also quotes FGIC’s CEO but I don’t know who that is so I can’t put it in.
Ms. Neville’s also about to learn something else. She’s about to learn in a video from one of the foundations that very early on, the mediator who all agreed, the chief mediator, is described as a powerful man in the city, and he is a powerful man in the city, that this powerful man came to him and said, “there are two issues that are going to tie this bankruptcy up. No. 1 is the art, and No. 2 is the city’s credit rating. This city can’t function without a credit rating. If we try to invalidate those COPs, if we try and say General Obligation Bonds aren’t secure, it’s going to go all the way to the Supreme Court and so will the art. And so we’ve got to take care of that and what I’d like you to do is can you put together some of your friends and come in and make a contributions, solely, we’ll make sure it goes solely to the bondholders.We won’t let those retirees get any of this. Absolutely not. We know they’re part of the problem. They were crazy to have allowed themselves to continue to work for the city with deferred compensation. They live here. They know the politicians. Their unions are the ones that run things around here. They’re getting what they deserve. But you bondholders. We’re going to do it like Central Falls. We’re not going to let you get caught in the middle of this.”
That’s what Ms. Neville says. Now, I would like to ask you something, your Honor. Take the “veil of ignorance” that John Rawls talked about for a moment and ask yourself, in that parallel universe, do you seriously think you are engaging a motion to strike Ms. Neville’s supplemental objection that she files where she says that it ain’t right and it’s not consistent with good faith and that she didn’t know what was going on and that this is the best she’s been able to piece together from the outside? Let’s have a trial on the merits of this case, your Honor.
Let’s not be striking things off and cutting them off before we have an opportunity to at least be heard. That is all we are asking.