Mayor Mike Duggan has been in office for six months. When he took office he asked residents to give him that same time period to show improvement in city services and government before they made a decision to leave the city. This week, the Detroit Journalism Cooperative has been taking a look at how and what Duggan has done in his first six months in office. Today on the The Craig Fahle Show, Bridge Magazine’s Nancy Derringer, Michigan Radio’s Lester Graham and WDET/Next Chapter Detroit’s Sandra Svoboda discuss with Craig what the mayor has — and hasn’t — done.
The 32,000 Detroit pensioners are in the process of voting on the city’s Plan of Adjustment — the document that guides how it will reduce debt and restructure after bankruptcy. The plan, of course, includes cuts for pensioners but some of the terms are confusing. To answer several of the pensioners’ common questions, a special Next Chapter Detroit segment of The Craig Fahle Show featured Michael VanOverbeke, general counsel for Detroit’s General Retirement System and WDET bankruptcy reporter and Next Chapter Detroit blogger Sandra Svoboda. The trio took calls from retirees and listeners.
Here’s a transcription of what was said:
Craig Fahle: Even when you are giving information that is factually based on what is in there, there still seems to be a reluctance to what’s in the deal, the terms of the deal, there still seems to be a lack of faith that this is binding in some capacity.
Michale VanOverbeke: I think it’s a real issue when you look at people have worked their entire careers with this understanding of a constitutional protection: you’re going to receive your benefit no matter what. And so it’s very difficult to hear facts that you don’t want to hear. So the natural tendency, I think, for a lot of people is to sort of shut down the moment you start talking about any form of a takeaway. It’s very hard for many of these people to sit down and get a clear understanding of what’s going to happen. It’s very complex. The plan language supplement that was included in the solicitation package is 24 pages. Most people getting a 24-page document kind of shut down after the first page so it’s a very difficult process for people to go through.
CF: And it’s certainly not something people can abstain from. In a lot of voting situations, if you don’t know what to do, you just don’t vote. That’s not one of those times when that’s a good option.
MV: If you don’t vote, the cuts will still apply to you and you will not get an opportunity to voice what your opinion is so we encourage people to take people of the opportunity to vote.
Sandra Svoboda: Why are we voting now? Why are we voting on this plan of adjustment and why not after there is some sort of formal court hearing?
MV: There has been a formal hearing on the issue of eligibility. The judge did rule that the city of Detroit was eligible for bankruptcy and as part of that ruling the judge did issue a ruling that in the bankruptcy court, the constitutional protection for retirement benefits does not sustain itself.
SS: How can that be? It’s in the Michigan Constitution.
MV: Unfortunately we are in federal bankruptcy court and federal bankruptcy law pursuant to the opinion of Judge Rhodes supersedes the bankruptcy protections in our state constitution.
CF: I think one of the other things that gives people pause here is there’s a feeling that there are other things that need to fall into place for this to be reality. If they vote for this now, what happens if nothing happens with the water department, for instance, what happens if some of these legal challenge to the EM law go through.
MV: Much of that will be resolved through the hearing process. The DWSD deal is likely not to occur. The Plan of Adjustment that has come out contemplates that there will no DWSD deal at least until sometime after the confirmation of the bankruptcy. The funding from the state has since been resolved, there were some questions from a lot of people about voting before the legislation got through the Legislature. That’s been accomplished. There are a lot of concerns about the foundation monies and things of that nature. But understand, the foundation money, the state money, the entire package commonly referred to as the “grand bargain” we like to think of it more as the “outside funding” in many respects, people would like it to be more money but it is what it is. We’re very thankful for it and it allows us to minimize the amount of cuts that the retirees will face.
SS: Let me tell you what I’m hearing from some retirees about that. They still have questions about the guarantee of that money. How do we know the $195 million from the state is coming in? How do we know the foundations will contribute the $366 million? And then I get the questions all the time, of the $100 million we call DIA money, isn’t that going to the museum? People think that’s going to the museum.
MV: The DIA is out raising money, has been able to secure some great funding, the autos have stepped forward to assist the DIA that money will be put into the other funds from the foundations as well as the state and will be contributed directly to the retirement system. The DIA is not getting any money in this deal. The DIA is getting the ability to come out and be a separate nonprofit.
SS: Where do you think it’s coming from that people think that money is going to the DIA and not the pensions?
MV: I don’t know exactly where it’s coming from. I will tell you that through this process we’ve discovered that there is a tremendous amount of misinformation that circulates, rumors, things of that nature, that are driving a lot of the decisions that people are making. Our concern is certainly making sure everyone is very well educated, very well informed so they can make an informed decision and try to get beyond the rhetoric and the misinformation so they can truly make an informed decision.
CF: We’ve got a couple callers on the line. Albert is in Detroit. Hello Albert.
Albert from Detroit: We voted this whole emergency manager thing down in Michigan a while ago and they circumvented what we voted for. That’s the suspicion with the governor right there. My second comment is, why can we borrow money to give corporate tax break and not for pensioners.
MV: The ability to borrow money to pay the pensions is certainly always been an issue. I think if you look at the history of Detroit, one of the reasons we are here in the bankruptcy is because they did just that. Ultimately when you borrow money you have to pay that money back. The concern here is the unfunded portion of the liabilities in the retirement system are of such a nature that the city can’t afford in light of its tax base to continue to pay those obligations.
CF: Sandra, that was the root of the swaps deal, wasn’t it?
SS: It was, that was something in the hundreds of millions of dollars of liabilities when those payments came due on that interest. I’d also like to follow up. I’ve heard that as well: why are we doing deals for new stadiums when pension are underfunded. It’s not really and apples to apples comparison. Those are very different pots of money. The pension are funded through employee, employer contributions of over the years. Stadium building is a whole different process. That’s kind of a short answer to that.
CF: There was a caller who could not stay to go on the air, Linda, she says you’l know what she’s taking about, Michale. She wants to know if there’s an average cap on the number of years to take back the 15.6 percent that’s part of the 21 percent. She says you’ll know what she’s talking about here.
SS: I think she’s talking about the Annuity Saving
MV: The numbers are a little off, the percentages.
SS: Let’s just back up a little bit and explain what she’s referring to in terms of the Annuity Savings Fund.
MV: The retirement system has long had a component to it. When you are participating in the RS, when you retire, there are two pieces to your retirement. The employees get the option of contributing voluntary contributions, post tax, to what’s called an Annuity Savings Fund while they are an active employees. They also accrue benefits for a pension.
CF: It’s an additional saving mechanism for employees if they choose to contribute.
MV: Exactly. Through the period of July 1 of 2003 to June 30 2013, the city has decided to look at that snapshot of time. A lot of the questions are why that period of time. That’s the period of time the city chose through its Plan of Adjustment to review. The board credited interest credits to those accounts and the claim of the city through the Plan of Adjustment is that they credited interest in excess of what was earned on the plan to the detriment to the pension portion of the plan. So the city is doing a recoupment. There are two caps that apply to that amount for active employees who currently have an existing Annuity Saving Fund account, ASF account, they will get a up to it’s a cap of 20 percent of their total account balance maybe reduced. There’s an interest calculation that’s a little more complex than we can do on the air without illustrations. Thy do an interest calculation and you get the lesser of 20 percent or the excess interest. For those that are retirees and no longer have an ASF account, you can’t just deduct that money from their account. There is also an additional deduction from their pension based upon their life expectancy and the amount of money that they owe and that is subject to a 15.5 percent cap. Under the Plan of Adjustment, there’s a basic 4.5 percent cut plus up to a 15.5 cap on the amount of reduction in your pension.
CF: OK, that’s clarifies that. Go ahead Sandra.
SS: Thank you Linda for that question. I heard a few more question from pensioner at the meeting last week. One is there’s a 6.75 percent on the payment included on that?
MV: Once they calculate, there’s a lump sum amount determined and they determine that your ASF recoupment is say $30,000, since they’re going to reduce your pension benefits over your lifetime, they do what’s called an actuarial equivalent reduction. In that calculation we have to estimate someone’s life expectancy. We have to actuarially calculate the amount of money that would have been earned on that money. Under the Plan of Adjustment, the interest rate is 6.75. So if someone owes $30,000 in order to determine what the reduction would be on their lifetime benefit, they use an interest rate of 6.75 percent and actuarial life expectancy tables. If someone lives two years and we don’t recoup all the money, it’s an actuarial adjustment so it’s equivalent over the plan. The concern expressed by many is if they outline their life expectancy, and most of us are really pretty optimistic about outliving our life expectancy table, right?
CF: Some of us.
MV: Most retirees when you’re going to have to have money deducted from your pension, you think pretty optimistic about that. So a lot of the concerns expressed and I completely understand them, is when they do the calculations and use that 6.75 percent interest, they see they will be paying back more than what they necessarily were determined to have to owe.
CF: Let’s take some more calls before we get too deep in the weeds here because there because there’s a lot there. Sarah from Detroit has a question about the voting process.
Sarah, Detroit: Thanks for taking my call. My understanding is that it’s common with voting process to be able to have some oversight of the voting and what I was told is that the company that is tallying the ballot is actually going to take the ballots to California and count them there and there’s not going to be any oversight or that so I was wondering about that. And then I thought of another question.
CF: Hold on. Let’s take the first one first and then I’ll come right back to you. Let’s not get two things confused.
MV: That’s a little bit of the misinformation. The company that was retained to count the ballot sis a company called Kurtzman Carson Consultants, KCC is how people generally refer to them. They are based in California. So no one is taking the ballot to California for counting. You must mail your ballot to KCC by and it must be received by July 11 to be counted.
CF: So it has to be received by July11. Not postmarked.
MV: Not postmarked, Must be received. It’s very import especially with the holiday weekend coming up, if you want your ballot to get there you want to make sure it’s mailed plenty early.
CF: That’s good information right there.
MV: That’s important for people to realize. But you know the retirement system has sent a representative of the retirement system to go and view and actually look at the tabulation process as it’s ongoing now as well as the retiree committee that represents retirees and was appointed through the bankruptcy trustee, they have sent representatives there so there’s very little concern that somehow this entity is going to miscount, miscalculate. And the retiree committee also will be reviewing any ballots that are discounted, not tabulated, things of that nature
CF: So people that are there to represent the retirees will have a chance to witness the count.
MV: Yes and it’s a little atypical than the typical voting in an election in that the ballots are being counted as they come in and recorded. It’s not like a typical election where you have a 12-hour, 24-hour period and everyone is counting the ballots and you’re witnessing at that point in time.
SS: KCC is a company that has been involved of hundreds of bankruptcies, their website is kccllc.com. You can go on there and see all of the other cases that they’ve had. It’s not sort of a fly by night company or anything.
CF: Sarah, you had another question:
Sarah: Thanks Craig. So another way that this whole thing has been explained to me is that there is this process of waiving your rights. There’s constitutional challenge to Public aAt 436 which is the law all of this is sort of coming under or through I should say. If the police stop you and ask to search your bag and say I don’t consent to a search then that protects your rights. If you waive your rights, anything they find you basically have waived your rights to any protections and so that voting for this plan is actually waiving the pensioners; rights to their constitutional protection and if I’s found unconstitutional, you know, they’ve cut their own throats.
CF: I’ve heard this one a lot and it’s question a lot of people have. Why do we have to waive our right to sue when we vote for this?
MV: It’s a great question. She used the analogy of getting pulled over by the police. I think a better analogy is you may be charged with a crime but prior to your trial you may decide to plea that crime to a lesser charge or some other type of charge to avoid the larger charge. It’s kind of the compromise settlement process. The Plan of Adjustment really reflects that compromise settlement position. The board has filed a Sixth Circuit Court of Appeals, other outside parties from the bankruptcy have certainly filed some forms of lawsuits and to the extent that they have done so, if they’re not part of the voting of Class 10 or 11, the police and fire, the general, those actions may continue through whatever process they will. But part of this process is the condition for the outside funding, the grand bargain as people like to call it. One of the conditions was that this would end the bankruptcy and end the litigation with respect to those parties that are benefitting from those dollars, and it’s typical of any type compromise where I’m willing to put money forward but you’re going to have to wage some future rights. And that’s probably the most difficult concept for a lot of people to understand and agree to. I think it’s important to know that Judge Rhodes rules already on the issue of the constitutional protection versus bankruptcy. That is on appeal. As part of the General Retirement System, and the GRS filed that appeal. People talk about CALPERS and other state retirement systems have file amicus briefs, We encouraged all that. We went out, we solicited those. We got those to be filed. That being said, we’ve met with our bankruptcy counsel, all of our bankruptcy experts, and the risks of pursuing that litigation at the loss of the outside funding is great. And so I think what people need to keep in mind is if they decide to pursue the litigation, they don’t get the outside funding, they’re facing deeper cuts. It’s really kind of a gamble.
CF: It is a gamble, but I think one of the things that’s motiving people is if the state guaranteed this, can’t we go after the state to fulfill the obligation even if the grand bargain goes away?
MV: That is one of the reasons I think the state has put their $196 million on the table. That’s never been tried. There’s no case law on that. That’s another form of a gamble: Can we get this to come through? I will tell you I’ve spoken to a lot of different people and I’ve gotten a lot of different legal opinions on that. I certainly have my opinion on that, but you know you have to understand that that’s a gamble, and are you willing to gamble on those dollars?
CFS: Let’s go back to the phones here. We’ve got another call. Aaron is in Detroit. Hi Aaron.
Aaron: Hi Craig. I know that just like me and most of the retirees and the active employees, we don’t understand all the legal aspects of what’s being dealt with but one thing we do understand is that the purpose for a contract in this country is so two parties will be held to an agreement, and we have kept our part of the agreement. We don’t understand why the illegality of this whole situation is not part of the debate. How can you make an agreement with someone and they fulfill their part of it and then because you mismanage your funds, you come back and say, “We can’t keep our part, as a matter of fact, we’re going to need something back from you,” and that’s legal in this country? I don’t understand that.
CFS: Aaron, I appreciate the call, and what a lot of public sector employees are looking at right now is what a lot of private sector employees have been dealing with for a long time. Ask Delphi employees how they feel about is too. It’s not fair, and this is a good question. And Michael, as someone who is obviously serving as general counsel, how do you respond to that when someone says, “This just doesn’t seem fair.”
MV: Well, it’s not fair. Frankly, it’s not. These people spent years in employment and based retirement decisions on an understanding that there was a constitutional protection to protect their benefits. Aaron, I completely understand your troubling with that. When is a promise not a promise? I’m the kind of person, shake my hand and a deal is a deal. It may be a good deal, a bad deal but I’ve got to live with it. Unfortunately the federal bankruptcy law, it was put into place to allow companies or individuals to evade a contractual obligation provided they meet certain requirements under the code to allow them to file for bankruptcy and discharge contractual obligations. And one of the concerns is Article 9 Section 24 of the constitution which is that provision that people refer to as protecting the retirement benefits, specifically states, retirement benefits shall be a contractual obligation which shall not be diminished or impaired. And Judge Rhodes’s ruling was it’s a contractual obligation and that’s what he bankruptcy code is intended to address: contractual obligations.
CF: Maybe this is something people can wrap their heads around too, and I’m not suggesting this is a good policy, but individuals file bankruptcy all the time to discharge credit card debts, things along those lines. Those are contractual obligations as well, are they not?
MV: That’s a promise to pay the credit card company for your expenditures.
SS: And frankly the municipal bankruptcy of this magnitude is new. This has never happened before on this scale. And like we said on the segment last Thursday on your show, Craig, we’re not talking labor agreements, it’s not collective bargaining. It’s bankruptcy and that’s a very different treatment. They’re not employees, they’re creditors now. Just like banks in some ways.
CF: We’ve got a number of callers on the line, let’s take a few more before we wrap up. Steven is in Washington Township.
SW: I’m a retired city employee and I’ve met Sandra — she’s a very nice lady — at one of the meetings. I’m one of the people with the clawback. I have an $89,000 clawback and with the 6.75 percent interest. I’m 55 years old, if myself or my wife, we live to 80, I’m sure one of us will, I’ll be doing a clawback of close to $200,000. I don’t know how that’s fair, and is it written in the bankruptcy documents about adding that 6.75 percent interest to the clawback? I was told that is not in the document.
SS: I wanted to say “Hi” to Steven first of all and to follow up. I also had your question about a lump-sum payback. I wanted to ask Michael about that. That’s part of a situation you’d be interested in maybe.
MV: It is written in the Plan of Adjustment that there will be an actuarial reduction in somebody’s benefit for the lifetime so the first part of your question, where is that written in the Plan of Adjustment, it is provided for in the Plan of Adjustment that it would be for those individuals that no longer have an ASF account there would be an actuarial reduction in their benefit over their lifetime. And from the perspective of how they do that calculation, it’s much like a mortgage in that if you owe me some $80,000 today and you’re going to pay me that over your lifetime, at the end of your mortgage you end up spending a lot more for your home than what you bought it for. The 6.75 percent interest is that interest rate that’s encompassed within the plan, and I understand his concern. So Sandra raises a great point and that is one of the things we are continuing to push for and having extensive discussions on a day-to-day basis is the ability to have a lump-sum (payback) option. In many instances I think people may look at see the lump sum option may be a little more expensive because they’re subject to the additional 15.5 percent cap in terms of total reduction and benefit but I think people should be able to make that determination, and we’re continuing to work with the city to try to get them to allow the retirement system to offer a lump-sum option.
CF: So that is something that’s still potentially open to negotiation at this point?
MV: Well, we feel that it’s open for negotiation. I don’t know if the city is really taking that position. They have engaged us in dialogue on it, and the retiree committee is engaging with the city and dialogue as well.
CF: Let’s take another call here. Paulette is in Detroit. Hi Paulette.
Paulette: Hi Craig. My question is about the ASF fund also. I just want to know how can it be legal to go back 10 years after you’ve gotten your money and in most cases spent your money for the city to come back and get this money that you legally earned through the fund that was a city fund, was sponsored by the city, encouraged us to put money into it. And you go back 10 years into the past, because if you go back into the past and you tell me that you know I’m going to get 7.9 percent then I’m going to put my money there, but if you tell me I’m not then maybe I’ll say maybe I’ll put my money somewhere else. But now I have no due process, I can’t go back and take my money out of the fund but you’re going back to take my money that I put in the fund 10 years ago. I just can’t see how that makes sense, and if it was allowed, the trustee board, the pension trustee board did it, if they did something that they shouldn’t have done then maybe they should be in court being sued for that but not me.
SS: I’ve heard that question asked: Was the ASF legal in the first place?
MV: The ASF recoupment is probably the most controversial aspect of the bankruptcy process and it hits a lot of people on an individual basis very hard. The issue of whether it’s not it’s legal or not will be an issue that will be directly addressed by Judge Rhodes as part of the plan confirmation process, so that’s very good that we’ll get that ruling ultimately. But understand the city’s position on this is there are numerous ways that they could have adjusted benefits through bankruptcy. They chose to do a 4.5 percent cut and ASF recoupment. The ASF recoupment in the eyes of the city, is just another way of adjusting benefits as it emerges from bankruptcy. They could have come through and said we’re going to adjust everybody’s benefit by 13 percent but instead of doing that we’re going to adjust everybody’s benefit by 4.5 and for those that received these interest credits, we’re going to make another adjustment and reduce their benefits in another manner. While clearly we see it as a recoupment and a clawback and we have challenged it on every level and quite frankly through the mediation process we were able to get caps on the amount of recovery. Understand if Class 10 or Class 11 don’t vote in favor and the outside funding doesn’t come in, those caps go away and the recoupment could be even more and Jude Rhodes has indicated in open court he doesn’t understand why there’s caps. So that’s another concern and reason we are supporting the plan.
CF: OK I’ve got time for one more call. Albert is in Southfield.
Albert: I guess in listening to this I had a couple questions. One, can the city default on the pension similar to the Delphi situation that you brought up earlier because I guess I look at it: the retirees don’t understand what that default means. I was caught up in that Delphi situation and I’ve lost 76 percent of my promised pension and even after 32 years I am still ineligible to collect that or start collecting it. I still have another year or two to go.
CF: Alright Albert, I appreciate the call. Thank you very much. The Delphi situation was a difficult one.
MV: And deeper cuts is one of the things we’re very much concerned about. Again, that’s the bankruptcy process and what happens as a result of bankruptcy. In this instance, the Plan of Adjustment arguably is a default of the city on the pension obligation because there will be a reduction but for general retirees that’s a reduction of 4.5 percent and depending on ASF recoupment 20 percent, not the 76 percent that was referred to. Once the city emerges from bankruptcy, the new pension benefit, the reduced pension benefit will now be again guaranteed by the state constitution, and I realize people look at that and say that’s what our protection was supposed to be in the first place. But unless the city goes back through a bankruptcy process again those protections will continue to exist and certainly the bankruptcy process is about reorganizing the city so that it does not again go to bankruptcy.
CF: We appreciate you being with us, Michael. Thank you very much.
-By WDET’s Sandra Svoboda
@WDETSandra and email@example.com
Artvest Partners, based in New York, advises “attorneys, dealers, insurers, other art world professionals and collectors,” Freep reporter Mark Stryker writes. The city and the DIA have requested the firm “provide a price range for the entire 66,000-piece collection at the city-owned DIA and assess the viability and practicality of selling art or otherwise monetizing the collection,” according to Bill Nowling, spokesperson for Detroit emergency manager Kevyn Orr.
While the “grand bargain” was designed, in part, to protect the museum’s artwork from sale, nothing is final in bankruptcy until the judge approves the city’s Plan of Adjustment. While Judge Steven Rhodes has indicated creditors can’t force a sale, some creditors have continued to seek that action, specifically bond insurer Syncora, who has sought independent appraisals of the art, subpoenaed numerous officials from the DIA and foundations that helped fund the “grand bargain” to testify about the collection and its value.
The Freep analyzes the hiring of Artvest as:
Artvest’s appearance in the bankruptcy drama opens a new front in the battle over the DIA and underscores that the fight is far from over — despite widespread support for Orr’s restructuring plan, whose $816-million grand bargain transfers ownership of the museum to an independent nonprofit while also preventing more debilitating cuts to municipal pensions.
Judge Rhodes has scheduled a June 26 hearing regarding Syncora subpoenas related to the grand bargain deal. The foundations filed a motion to quash Syncora’s subpoena.
Syncora responded in a June 18th filing, arguing, in part, “…the Foundations’ suggestion that they are minor players in this bankruptcy ignores the practical realities of this case — as well as their own press releases.”
Chief U.S. District Judge Gerald Rosen is also the chief mediator in Detroit’s bankruptcy process. Confidentiality is observed regarding the ongoing talks, but Judge Rosen appeared at a news conference June 9 at the Detroit Institute of Arts where the Detroit Three automakers’ $26 million was announced as being added to the Grand Bargain funding.
Because it is so rare for any federal judge to speak publicly, let alone the one who is overseeing negotiations in history’s biggest municipal bankruptcy, Next Chapter Detroit is sharing Judge Rosen’s unedited remarks today. He recounts some of the history and development of the Grand Bargain, thanks those who are contributing money, recognizes work left to do in the Chapter 9, and finally lauds and introduces two representatives of Detroit’s 32,000 pensioners.
“I couldn’t help but think maybe we’re setting the template here in Michigan for how this should be done,” Rosen says. “It’s about Detroit’s retirees who have given decades and decades of their lives devoted to Detroit.”
Earlier this week, Judge Steven Rhodes identified 14 legal issues that need to be decided before the city of Detroit’s “trial” on its plan to exit bankruptcy. They include a range of topics including whether Macomb, Oakland and Wayne counties have “standing” to object to the city’s Disclosure Statement and Plan of Adjustment (as they have done in legal filings), if some provisions of the plan violate state or federal law, and whether the plan legally handles plaintiffs with pending civil rights claims against the city.
He had set a date in June for a hearing about them. Today, after attorneys filed several briefs outlining why they needed more time to prepare for and make their arguments on the select issues, he moved the hearings to July 16 and 17.
Meanwhile, several creditors continue to argue for delaying the July 24 date for the confirmation hearing/trial on the plan. The Detroit News reports:
The creditors argue Detroit has delayed turning over documents and that they need more time to prepare for trial. The new proposed trial date is Sept. 18 and will determine whether Rhodes approves the city’s debt-cutting plan.
We’ll see if moving the hearing on the legal issues, now set for just a week before the trial date, is an indication that the city’s confirmation hearing also will be moved.
While Kevyn Orr was at the Mackinac Policy Conference last week, he sat down with WDET’s Craig Fahle for a segment on the show. Here’s a transcript of what Craig asked and Orr said with some links to articles and posts to provide background and context for the conversation.
Craig Fahle: Talk about squeezing this in and why it’s important enough to squeeze in a conference like this while you’re in the midst of all this.
Kevyn Orr: We are at a critical stage and we have some significant milestones coming up whether it’s getting the funding from the Senate, getting the vote on the plan. There are some actives who are a little reluctant, and we want to make sure they understand the risk and the reward of doing that. This is really an opportunity for me to get and tell everyone we are not done by any stretch of the imagination. We may be in the third turn coming into the fourth. We’ve got that fourth turn, we’ve got a long, long runaway, straightway and we can’t really trip up now. That’s why it’s important.
CF: I think there was a little understatement there and a little reluctance is the phrase you used. Talk about the conversations you’re having, or are you able to have conversations about this or does it create a problem with the vote.
KO: We’ve been having town halls, my staff, and I’ve been speaking to some of the leadership but it’s really critical because I think one of the thing I have not done, I didn’t want to be a fear monger. One of the things I have not done is say: If we don’t get this funding, if we can’t get this vote, we don’t just go back to square one. The outcome of the plan would be much more draconian. We’re talking about retirees having to choose between medicine and cat food in some cases. There could be cuts as deep as 40 percent. For someone making $20,000, they could lose 8,000, end up on 12,000. That means they could end up on the federal poverty level which mean they go to the state for assistance, Medicare, Medicaid for their kids, it would be catastrophic. I didn’t want to be alarmist but I do want to say this is significant. It’s very, very important that we get this done.
CFS: One of the things that we talked about very early on in this process when you were developing the original plan of adjustment here was whether or not there was going to be some floor which you would not allow people to fall through when it came to the cuts.
KO: And we have that in this plan. We took some of the unlimited general obligation tax bond settlement and used it for an income stabilization program so that no one, no one is pushed over into poverty. But if we don’t have the settlements approved, if we don’t have the plan, that goes away because we don’t have a deal with our bondholders and we may not be able to do that so what we retelling some of the members in the House last week was look this is going to come to the state one way or another, either through the state settlement, that present value funding of the $195 million or through increased people on the assistance roles, we need to tell the voters, the constituents that are out there. This is significant. It is an opportunity for us to reset the city, it is an opportunity for us to preserve you and your health care and potential pensions but without it, it would be much more drastic.
CFS: This is obviously a big step here, in terms of getting those who are potentially impacted by this to vote in favor the plan. We had a snafu this week. A couple thousand ballots went out with inaccurate information. Does that set back the timetable or can it?
KO: No it doesn’t actually because the funny thing about it, when we found out that some of the information was inaccurate, I said immediately, look, let’s go correct it, let’s do the right thing, let’s do this right. We don’t want anyone to feel that they were gamed and not change it. The net result is it’s actually better for those 2,000 potential employees or retirees because it’s a lower cost to them for the alternative savings fund. That’s what drove it when we got the information, the actual calculations went down. They got a better deal even though administratively we have to get these ballots out.
CFS: The judge was less than pleased.
KO: As he should be.
CF: So he wants a name by Friday as he said.
KO: That’s in litigation. I’m going to leave that to my litigation team. We’re correcting the problem but I certainly appreciate the judge’s consternation at trying to run a fair and accurate process and how a glitch could upset a jurist in that way.
CF: Obviously the state House passed the state’s portion of the grand bargain, the Senate’s going to take it up next week. That was another pretty significant hurdle. There we a lot of questions about whether out stet legislators were going to care enough about Detroit’s plight to vote in the affirmative.
KO: Yeah, I had those questions.
CF: OK, let’s talk a little bit about what you were going through, what was going through your mind when you watched those totals come in?
KO: We had spent some time up on the hill in Lansing and went through the business case for the funding. And when you did you saw the light go off in people’s minds of saying, “Oh, OK, I understand it. I get it now. This is not only in the interest of Detroit it’s in the interest of the state if not in the interest of the country because Detroit is one of the 21 economic centers, metropolitan economic centers in the country that accounts for half of the United States $16 trillion GDP. So it’s also an economic conduit for the entire state and as I said before, if people don’t get this funding, if we don’t get this resolved, people will be pushed into poverty They’re coming to the state one way or another. There are folks who certainly have some sincere and well thought out concerns in the out state but I think when they looked at the merit of the solution, the fact that it was lower to do it at net present value financing, it was expressed in the vote. We’re very thankful for that.
CF: Mayor Duggan, of course, gave a pretty rousing speech a couple of days ago at the conference and it certainly seems to me as if he’s suggesting that he can handle this job once your term expires and the council and the mayor have made it pretty clear that even if you agree to stay on past this original term that likely isn’t going to happen. What stage does this bankruptcy need to be in for you to feel comfortable to step away at that point?
KO Certainly we put a lot of blood, toils, tears and sweat into this thing. We want to make sure get through the confirmation hearing and we have an order but as the judge has said he wants to make sure that it’s done in the right way. We’re going to be respectful of that process and the issues that the court process has to go through to get there. We’d like to think that we’ll keep to the schedule that’s out there right now and by the fall, certainly by October, we get a ruling in and then be able to go through that process and go forward but well deal with that as it comes up.
CF: There’s been a lot of discussion in recent days about the water department. I know this is still in litigation, there are still negotiations going on and the judge has put a gag order on so we can’t get into a lot of it at this point in time but suburban leaders have been pretty vocal and not necessarily observing the gag order on this question and there’s some discussion about tying this potentially to the grand bargain discussions in the Senate.
KO That would be a mistake. You know, the issue of an authority. I think Judge Feikens began discussing this in 1982, 1984. Certainly Judge Cox who is the mediator in this case discussed in his opinion last year. So this has been going on for a long, long time. We proposed what we thought was a solution to address all their concerns. For whatever reason that didn’t happen. We’re in mediation so I can’t talk in details but we’re going to dual track it. We’re also talking to one of the biggest operators and managers of water in the country, two of them, actually for a potential contractor and we’re going to pursue that as well. We certainly think an authority is in the best interest of the city and its customer base, meaning the counties, but we’re at a point now where we can’t wait around for people to finally see if they can find their way. We’re more than happy to try to pursue it though.
CF: When you talk about the water department and potential privatization, is there a situation where you could see a whole sale of the water department or would it strictly be some public-private partnership?
KO: No, we’re talking about operational and management contracts which is not a sale. In fact, specific terms of the RFP that we sent out would be that all of the assets, including the assets that we have now as well as any assets that are developed over time under the management, remain assets of the city. I want to be very clear about this. There’s no discussion whatsoever about selling the water department. We’re talking about managing it as other communities have quite successfully for the benefit of the city and the counties.
CF: Talk a bit about Mayor Duggan though and the relationship that’s developed there at this point in time. You’ve obviously got different responsibilities. He made a point to suggest that the police department is still not under his control. I think he’d like to see that change. What is preventing that right now?
KO: Well, you know, when the chief came in, one of the things we wanted to focus on it’s not just the mayor, the police commission wanted to focus on was restructuring the department in a way that made sense and how departments are structure around the world. The chief has done a wonderful job. He’s driving violent crime down by double digits. Car jackings are down by 12 percent this year. There will come a time when it will become appropriate for us to go back to ordinary course both for the mayor and the police commission but I wanted to give the chief the opportunity – he’s only been here for less than a year and look at what he’s done in that time. I wanted to give him the opportunity to do the restructuring that needed to be done for the department to make the department a modern-da police force in the city and then there will be a transition period and I think that’s appropriate.
CF: Would you expect anything else from a mayor other than the type of chirping that “I need control of all this”? Does that impact the relationship?
KO: No it doesn’t. The mayor and I talk regularly. I certainly know that any mayor wants control over martial organization like the police but we have as he’s probably said, some fairly frank discussions. I would be more concerned if the indicators were going in the other direction, if crime was up. It’s not. If carjackings were up. They are not. If we weren’t solving cases and handling evidence the right way. We are. In fact in the past year now from one of the consent decrees, the one regarding confinement, we’re hopefully trying to get out from under one we’ve been under for 10 year dealing with excessive use of force. So there’s been progress just in that time. I understand it. I appreciate it. But all the indicators are going in the right way, and as I said, when the time become appropriate, hopefully in the near term, we’ll make that transition;.
CF: At the beginning of this interview, you said, “We’re still a long way from being done. We may be approaching the third turn.” Talk about some of the red flags that are still out there for you. Obviously some of the bond insurers have been throwing all kinds of legal action which you would anticipate. You told us this as going to happen. But what are the red flags that are still out there for you. The vote, obviously.
KO: I take nothing for granted. A friend of mine told me a long time ago, just because you’re paranoid doesn’t mean someone’s not trying to kill you. I keep up a healthy level of paranoia. Even last week with the vote in the House, I was watching it anxiously. Same thing now coming into the Senate. I take nothing for granted. These are autonomous legislatures who have to have their own counsel, make their own conscience. So we’ve got to get through that. I don’t take the vote for granted. I think this plan: 100 percent restoration of pensions and cost of living for police and fire, in my mind I can’t imagine anyone would vote against that but maybe somebody has other issues. For the GRS retirees, general service, I certainly recognize that for them it’s not just the 5 percent cut that’s going on in their pensions but also alternative savings fund, but that’s a result of over double-digit returns, excess returns that shouldn’t have been gotten, money taken out of the trust, which is my requirement as a fiduciary to put it back. We’re not taking all of it. We’re taking 20 percent. So I understand but even that’s better than the outcome so in my mind, this is a really fair deal, compassionate. Certainly Syncora has voiced a lot of concerns that it’s not fair. I had a friend in New York tell me today that they’re getting packages from some of the financial press in New York that are hearing from some of the bond insurers trying to undermine the deal and sell the art. They’re making a full court press.
CF: They cannot demand that that happen.
KO: They can demand anything they want but under the statute, we don’t have an obligation to sell it. That’s one of the benefits of Chapter 9. The thing that people that are trying to speak to have to understand that even if we did, those funds wouldn’t be spread to pensions, they’d be spread out over the whole $12 billion of unsecured debt resulting in less money to the pensioners. They’re creditors and that’s what they’re going to do: try to run the tables on that. Then we’ve got to go to the confirmation hearing which promises to be a battle royale.
CF: Are we really attempting right now to sort of define what constitutes fair in a Chapter 9 bankruptcy? Because this is a rare thing.
KO: You have to be fair and equitable. You can’t have unfair discrimination.
CF: Who decides? Is it solely the judge?
KO: The judge. The judge has a heavy lift. That’s part of his job. We have to be sure we can defend our case and the decisions we’re making under the doctrines of Chapter 9 which give the municipality, for instance, it gives us exclusivity. Only we can file a plan of adjustment unlike Chapter 11 where creditors can. The doctrine of Chapter 9 recognizes municipalities’ inherent autonomy to control its affairs and its assets.
CF: Does the guidance of a mediator in this process give you more confidence that the deal that are negotiated to in all of this are going to be agreed to by the other judge. Because Gerald Rosen has been working very hard on these things but the (bankruptcy court) judge hasn’t always gone along with the recommendations that he’s made.
KO: I’ll tell you this: We would not be where we are without the help of Gerald Rosen, Judge Rosen and his mediators. These deals have been worked late into the night, 24/7, weekend calls. I can’t tell you how many Sunday, Saturday night after midnight calls we’ve had. Around the clock. We would not be where we are without that mediation process and certainly the mediators are not the presiding judge. Judge Rhodes ultimately has to decide. That’s his role. These mediations on a consensual agreement are really unprecedented. They’ve been tremendously, tremendously helpful and valuable. We wouldn’t be where we are without them.
CF: One last question. Obviously it’s not a done deal yet. We can’t write the book on what Detroit’s bankruptcy is going to look like but is the process going better than you thought it would.
KO: I’m going to be careful. The minute I say it’s going better somebody is going to make sure it’s going worse. That’s just the nature of the beast. Are we further along? Look, if you had told me a year ago that we would have the agreements with some of the counterparties that we have, that we would have almost a billion dollars of new cash coming into the city to deal with pensions, that we would be further along with some of the restructuring efforts to be involved in, that we gave $12 billion last June to the public lighting authority. They didn’t use it but just in the past six months, the mayor, the council, the lighting authority are turning on 500 lights a week. If you told me we’d be at this point a year ago, I would have been somewhat skeptical. I would’ve thought it would come down right to the wire. We’re doing a little bit better than I had anticipated but we still have a long, long road and a lot of pitfalls and a lot of folks that are trying to trip us.
CF: We’ll leave it right there.
The overwhelming attitude at this year’s Mackinac Policy Conference is optimism about the future of Detroit. Between the rousing speech Mayor Mike Duggan gave the first day to Gov. Rick Snyder’s public commitment to restructuring the city and funding pensions with state money, the audience has been applauding and envisioning a functional Detroit post-bankruptcy.
But Detroit News columnist Daniel Howes urges some realistic caution with that healthy optimism:
For as much as attendees this week to the Detroit Regional Chamber’s Mackinac Policy Conference may sense a Detroit on the precipice of radical change, establishing the legal framework to exit bankruptcy by October and complete the municipal restructuring is fraught with uncertainties political leaders and the city’s bankruptcy lawyers cannot control.
While the city has reached agreements with several employee and retiree groups, pensioners as a class still must vote in favor of the city’s debt-restructuring plan as part of the bankruptcy case. Without favorable votes from the pensioners, the “grand bargain” money goes away. Until the votes are counted in July, the results won’t be known.
Howes also points out the July 24 confirmation hearing is not a date set in stone, and the future structure of the Detroit Water and Sewerage Department isn’t set.
Detroit’s bankruptcy still has several “next chapters.”
While Detroit’s bankruptcy and revitalization were discussed at the Mackinac Policy Conference (and on the porch of the Grand Hotel), attorneys for the city and several of its creditors were in court in Detroit today, addressing several issues related to the Chapter 9 proceedings and the voting on the city’s Plan of Adjustment.
First, it was revealed that thousands of retirees received inaccurate ballots and will need to vote again, writes Robert Snell in The Detroit News:
The city sent an estimated 2,000 ballots with inaccurate data about money Detroit wants to recoup from current and former workers. The current and former workers, who are covered by the city’s General pension fund, will be sent new ballots with accurate information and get a chance to vote again. “It will undoubtedly result in ‘no’ votes that might otherwise have been ‘yes’ votes,” U.S. Bankruptcy Judge Steven Rhodes said during a hearing Wednesday. “This is very, very unfortunate.
“Who do we hold responsible for this?” Rhodes asked Detroit bankruptcy lawyer Bruce Bennett. Bennett, one of the lead lawyers from the Jones Day law firm, said he didn’t know. Rhodes demanded a name on Friday.
Second, Judge Rhodes said millions of water customers have not paid enough for Detroit Water and Sewerage Department services and could pay more soon. The Detroit News reports:
The 4 million customers across Metro Detroit will pay more if U.S. Bankruptcy Judge Steven Rhodes approves the city’s debt-cutting plan. The failure to pay more for water service led to a shortfall in the city’s pension funds that would be fixed if Emergency Manager Kevyn Orr spins off the utility to Wayne, Oakland and Macomb counties for about $47 million a year. City bankruptcy lawyer Heather Lennox said rates need to be hiked in the city’s debt-cutting plan to pay for capital improvements.
“We are predicting modest rate increases,” she told Rhodes during a hearing Wednesday. A possible spinoff of the Detroit Water and Sewerage Department is one of the more controversial aspects of the city’s restructuring plan.
Detroit’s bankruptcy is far from over.
Judge Steven Rhodes still has July 24 scheduled as the day to begin confirmation hearings on the Detroit’s Plan of Adjustment — the document that explains how the city proposes to restructure its debt and operations post bankruptcy. But between now and then, there are plenty of outstanding issue he’ll address in court documents and hearings. Here are few that are pending:
First, creditors continue to pressure Judge Rhodes to delay the hearing. At a May 22 status conference, attorneys for several creditors urged the judge to postpone by a few weeks the July date. “There are many different creditor issues, any one of which, in my world as a complex litigator, could itself be a multi-year litigation,” said Stephen Hackney, a Chicago-based attorney for bond insurer Syncora. “I can’t come as a surprise to us that there are complicated issues to work through and complicated issues on discovery.”
To help along issues related to document production and witness lists, Judge Rhodes ordered attorneys for Detroit’s creditors to form a Committee on Discovery and Trial Efficiency, which they did. He has told the attorneys he hopes they can work out discovery-related issues themselves, but he will continue last week’s status conference on May 28 where he will continue to hear updates about the discovery process…and undoubtedly continued objections from attorneys to the timeline.
“I cannot adequately represent my client as the schedule is currently constructed,” said Guy Neal, an attorney with the Sidley Austin law firm from Washington D.C. who represents National Public Finance Guarantee, which insures about $1.8 billion worth of Detroit Water and Sewerage Department bonds. “We’re stuck on discovery but not even deposition discovery. We’re stuck on document discovery.”
Second, while it’s largely the city that’s pressing for the ambitious court schedule, Judge Rhodes’s appointed (and paid) expert witness has complained the city is preventing her from doing the necessary work to evaluate the feasibility of the city’s plan. An attorney for Martha Kopacz filed a letter with the court stating, in part, that the city’s accounting firm, Ernst & Young, was not providing her with complete financial information about the city. Kopacz wants the information on which the city is relying to make multi-year financial projections.
Judge Rhodes issued an order that he would consider Kopacz’s complaint at a May 28 hearing.
Third, the issue came up at last week’s hearing what would happen with the city’s contract with Jones Day law firm if the Chapter 9 case continued past September. That’s when the Detroit City Council could vote to remove Emergency Manager Kevyn Orr from office. Orr, of course, is a former partner with the Washington D.C. law firm, and the previous City Council voted to contract with the firm.
In court, the Jones Day attorneys said they weren’t sure what would happen if the bankruptcy case wasn’t settled by Orr’s exit date. “We have not had discussions to my knowledge going beyond that,” said Gregory Shumaker, a Jones Day attorney. “The mayor, the city council, it would be up to them whether Jones Day would continue its representation of the city.”
A day later the Detroit Free Press reported what Mayor Mike Duggan thought about that issue:
Mayor Mike Duggan’s office said Thursday he won’t support extending Kevyn Orr’s time as the city’s emergency manager or keeping on his former law firm, Jones Day, if Detroit’s bankruptcy extends beyond Orr’s expected exit date in late September. … Duggan made clear that if the bankruptcy proceedings extend beyond Sept. 25, he won’t support keeping Jones Day as the city’s law firm in bankruptcy. “We have no intention of keeping Jones Day,” Duggan’s spokeswoman and chief of staff, Alexis Wiley, told the Free Press. “We have every intention of running this city, and that means both services and finances.” Wiley declined to discuss how Duggan would handle the bankruptcy after ditching Jones Day, or which lawyers would pick up where the firm left off.
The Detroit bankruptcy story is far from ending.