In approving Detroit’s Plan of Adjustment, bankruptcy judge Steven Rhodes is allowing a group of lawsuits to go forward against the city. WDET/NextChapterDetroit.com’s Sandra Svoboda spoke with Attorney Bill Goodman about his clients, their civil rights claims against the city and what the bankruptcy judge decided about their cases.
Goodman: What Judge Rhodes did in his opinion was to say that those people who have sued the city of Detroit and Detroit police officers and other Detroit public officials for violations of their constitutional rights may not go forward in those actions against the city of Detroit itself. The city of Detroit itself can only be sued under this federal civil rights statute for its policies, its practices, its customs. Those cases cannot go forward. But the cases against the individual officers can go forward, the bankruptcy proceeding does not impede those cases from going forward. People can rectify to some extent the wrongs that were done to them, that they can get justice in that way, and the city has to indemnify those police officers. That is if one of my clients sues a Detroit police officer and gets a million-dollar verdict, the city itself has to pay for that police officer’s verdict so that the police officer himself or herself cannot be personally attacked for that.
Svoboda: And when you say they have civil rights complaints, civil rights claims, tell me a little bit about what some of these cases involve.
Goodman: Really, our flagship example is Walter Swift, a man who spend 26 years in prison for a crime that he did not commit and that everyone knows he didn’t commit and was exonerated and released. Still, he has been waiting since this bankruptcy, has been waiting before, cannot go forward with his case, cannot get justice, is personally impoverished and has had his life taken from him. He’s one example. There are others. There are people who have been falsely arrested at raids conducted by the Detroit police department.
Svoboda: So most of what he hear from Judge Rhodes and what we report about the bankruptcy have to do with these complex financial settlements or bankruptcy law itself. Where do these individuals fall within this case?
Goodman: They’re what’s called unliquidated creditors. They’re like anybody whose garbage can was destroyed by a garbage truck and said, you know, “Hey, you guys have to pay for this” Or someone who was in a bus accident. That’s who they are. The difference that they have and that we have asserted is these people are people whose constitutional rights have been violated. And the constitution of the United States in a democracy should be supreme. It should not fall under the wheels of a bankruptcy proceeding.
Svoboda: But Judge Rhodes disagreed with you in his ruling on that piece of it.
Goodman: And I disagree with Judge Rhodes, right back at him.
Svoboda: But your cases now can go forward because in confirming the Plan of Adjustment, as you described at the beginning, discussed how the individual cases could proceed. What’s next for you?
Goodman: Next for us is that our cases start proceeding. In Walter Swift’s case we start taking depositions. We go forward. We go to trial if we need to, and Walter gets to present his case to a jury and have a jury decide whether he’s right or not. That’s how we go, and our case is based upon what he said, and I’m looking for his written opinion. I take it that the stay of proceedings in those cases is going to be lifted as to the individual cops.
Svoboda: What’s the legal history for these claims and how does it play in to the greater legal sense going forward?
Goodman: The Civil Rights Act under which these people have brought their claims is called Section 1983 of the federal code 42 USC. It really is known as the Civil Rights Act of 1871, and it was passed, it was really originally passed in 1866 just at the time the 14th Amendment to the U.S. Constitution was passed. It was passed during a period of huge turmoil in the United States, of the Ku Klux Klan riding high, a birth of a nation racism rampant throughout much of the nation, and it was meant to correct that and hold public officials responsible for what they did. That need, that impulse is still of critical importance not just in 1871, not just in 1961 when that law was made to be really effective by the United States Supreme Court. But today, we need to have a rule of law, and in the United States, in a democracy which we claim to be, that means under the United States Constitution.
Judge Steven Rhodes is on the bench, and closing arguments have begun. Here’s the lineup attorneys predicted last week.
This morning, city attorney Bruce Bennett has been outlining why the latest Plan of Adjustment should be confirmed, focusing so far on the settlements and moves that reduce city expenditures. This afternoon, additional attorneys supported the plan while two individual objectors spoke against it.
Detroit’s bankruptcy trial is done. Judge Rhodes will give his opinion at 2 p.m., Friday, Nov. 7.
Assuming he confirms it, he said he will schedule a hearing to discuss the form of the confirmation order and implementation issues.
Individual objector Michael Karwoski also objected to the city’s plan, arguing to the judge he should reject it and require the city to file another plan.
Karwoski filed this objection and 98 people filed joinders. During the trial, Karwoski questioned witness Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System. Karwoski’s questions for her covered topics of pension fund governance, investment interest rate assumptions and the annuity savings fund recoupment.
He disputes the city’s contention that some retirees received “excess interest” on their annuity savings fund accounts, calling the city’s plan to reclaim some of the money an “illegal and unjust” measure.
After attorneys supporting the city’s plan spoke, individual objector John Quinn, an attorney, argued against adopting it. He objects specifically to pension cuts and the “clawback” of some annuity savings fund monies from general service retirees.
Here’s the background: the annuity savings fund was 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.
Here is the objection Quinn filed in the case.
Barbara Patek, representing the Detroit Police Officers Association, spoke in support of the plan. She said police officers were uniquely positioned to observe the bankruptcy’s real effects in the city.
“We didn’t need a bus tour or a complicated set of spreadsheets to understand the insolvency. Our members lived it every day in their work,” Patek said.
Robert Gordon, of Clark Hill law firm, represents the pension systems. He also spoke in support of the Plan of Adjustment and its settlements for pensioners.
“These settlements vary in their treatments and their projected recovery reflecting the varying rights of creditors groups,” Gordon said. “Somewhat miraculously a consensual plan is now before the court. … All of Michigan should be proud.”
He was followed by Ryan Plecha, who represents the Detroit Retired City Employees Association and the Detroit Retired Police and Fire Fighter Association. He credited the mediation process as the “only way” settlements were reached.
“I must also note the courage and the dedication of the DRPFFA … along with the same efforts of the DRCEA … in making the difficult choice to reach an agreement withe the city,” Plecha said.
Representing the Official Committee of Retirees, Claude Montgomery urged Judge Rhodes to adopt the plan. “The official request comes only from the city but we would ask you to approve the global settlement,” Montgomery said.
Here are highlights of what else he said:
On the varying impacts of the cuts of cost-of-living allowances (COLA) for retirees, depending on their age:
“If you don’t have very long to live, COLA doesn’t mean very much to you. If you have a long time to live, COLA means a lot to you.”
On the 6.75 percent rate presumed for pension investments:
“It’s a negotiated number. A higher number means fewer benefits cuts but greater city susceptibility to financial risks.”
Representing the state, Steven Howell, of Dickinson Wright, made some closing statements in support of the Plan of Adjustment. “Although the filing of Chapter 9 has not been popular, there’s no question it was the right thing to do,” Howell said. “In this confirmation hearing, many of the city’s witnesses has since testified to the strides the city has made in improving services to its residents. … We cannot allow the city to fall back and continue its downward spiral.”
The state is providing $195 million to the city’s two pension funds and has financial oversight of city operations and pension fund management, according to terms of the Plan of Adjustment that were passed by the Legislature and signed by the governor earlier this year.
Also in the courtroom audience: Rep. John Walsh, R-Livonia, who chaired the committee that first considered the “grand bargain” bills in the Michigan Legislature.
Judge Rhodes asked Bennett what he thought the two or three top risks were to the feasibility of the Plan of Adjustment. Here’s how Bennett answered:
Everyone recognizes that there has to be flexibility in implementing the (restructuring initiatives) going forward, and it’s impossible sitting here in 2014 to decide exactly how money is appropriated in like 2018 or 2019 should be spent. I know that your Honor has confidence in Mayor Duggan and his administration – it’s a very impressive group. We don’t know how long they’re going to stay. We have to make guesses about who’s going to be there in the future. I would say the risks that are controllable are sticking with the plan and using the money, the huge amount of budget surpluses are projected and earmarked … earmarked for critical investments in critical areas. To the extent that they’re deployed or adjusted in any way, it’s got to stay for that: critical purposes in critical areas that may evolve over time to a degree but what we don’t need is the use of that money for other purposes that someone might decide is more politically expedient.
Bennett also said a risk is if there is misspending or the perception of misspending of the $1.7 billion budgeted over the next decade for improving city services. “Either would be a huge problem,” Bennett said.
He also said the city needs to regularly invest in critical infrastructure and services, for example, an information management system.
When Rhodes asked about how the city can ensure pension obligations are met, Bennett said:
The national labor organizations have to put pension funding high on the bargaining list.
Before breaking for lunch, Judge Rhodes told Bennett he wanted him to clarify what the plan intends to do with respect to 1983 claims. The “1983” refers to the Civil Rights Act, and the creditors include litigants who have lawsuits against the city relating to, for example, police misconduct and wrongful convictions.
Here’s some background about those cases:
The presumed interest rate for pension investments was an often-visited topic during witness testimony during the bankruptcy trial, and Bennett re-visited it during his closing statements.
(The Plan of Adjustment sets the presumed rate of return at 6.75 percent, which is at the low end of large public pension funds nationally.)
Bennett said in his closing arguments that the interest rate should be considered a reflection of how much risk the city is taking, and given the city’s situation, having low risk is the “reasonable” approach.
Bennett made an economic, cause-and-effect argument against the city raising taxes to pay debt, as some creditors had suggested during the trial.
“Municipalities in today’s world are really competitors with other municipalities,” Bennett said. “It’s happening every day when people are deciding where they are going to live. … It’s important: what does the community offer and what does it cost to live there.”
He recounted Mayor Mike Duggan’s testimony, who said the city is just “10 percent” of where it needs to be in terms of providing city serices.
“He started talking about the fact that people are going to compare us with what’s going on in the suburbs,” Bennett said. “Your Honor … in many places we have shown you that Detroit’s taxes are the highest of any city in Michigan and in places we’ve shown you and the record has shown you that our services are not. … Far from it, unfortunately. Hopefully we’ll get there.”
Raising taxes would only drive away residents, Bennett said, and existing ones may choose to not pay any more.
“We already have a delinquency problem. It would only get worse,” he said.
Raising taxes to generate more income is “not sensible” for Detroit, city attorney Bruce Bennett said.
He reviewed testimony that the Michigan Legislature is not likely to pass measures that would allow Detroit to raise taxes, a necessary provision because the city is near its taxing limits under state law.
“I think we all know that to be right,” Bennett said.
The city did “extensive” work to determine how to monetize its assets to reduce debts, sometimes paying creditors, sometimes creating other deals, city attorney Bruce Bennett, of Jones Day.
One example: “The entire cost of Belle Isle came off the city’s books. Therefore, money was saved … and generated to be used for other purposes,” Bennett said.
He also discussed the creation of the regional water authority, the Great Lakes Water Authority, which was a product of bankruptcy-related negotiations about the future of the Detroit Water and Sewerage Department (DWSD).
“The city looked at DWSD from a variety of different perspectives,” Bennett said, with a focus on raising money for the city’s general fund.
“Certainly the city did tons of work in this area. Others, of course, had very strong views about whether DWSD or any part of DWSD’s value could ultimately make it to the general fund because of its special status essentially as a utility that performs work for fees.”
But not every city asset was part of a settlement in the case, Bennett pointed out. He cited the Coleman A. Young International Airport, commonly known as City Airport.
“There really isn’t an immediately available alternative but it has to be kept alive for other good reasons. So that’s a failure, couldn’t accomplish anything significant there but it wasn’t for lack of trying,” Bennett says.
City attorney Bruce Bennett, of Jones Day, is addressing the reasons why the Detroit Institute of Arts collection does not need to be sold to pay debt. He recounted what some of the witnesses said when they testified earlier in the trial.
“There really isn’t a dispute that the DIA is a nationally recognized cultural institution that contributes to the city. It contributes to the image of the city. It contributes to the city’s rehabilitation. It might even contribute to bringing residents back,” Bennett said. “It is most assuredly a reasonable decision for Detroit to make to keep a world class art museum.”
Judge Rhodes interrupted Bennett’s statement to pose a question.
“What do we say to the pension claimant whose pension is impaired as a result of that decision?” the judge asked.
“We say to pension claimants in this what we say to other creditors,” Bennett said. “There’s no law that says a pension creditor has to be paid by causing a city to sell its assets.”
Judge Rhodes has taken a break to take a phone call. He also requested a meeting in the jury room with city attorney Thomas Cullen, of Jones Day, and a representative from the city law department.
He’ll resume closing arguments at 10 a.m.
“I think many of our pro se objectors do object to the DIA settlement in the way that it protects the art in this context, in this bankruptcy, from their pension claims,” Rhodes said.
“I’m going to cover it. We’ll cover it very thoroughly,” Bennett said.
City attorney Bruce Bennett told Judge Rhodes that the Detroit bankruptcy case proves that municipal bankruptcy is not about simply distributing city assets to pay claims. Bennett praised the settlements the city’s reached with creditors – totally about $7 billion of the city’s $18 billion in debt – because they don’t sell off the assets.
“Instead they are deployed in a way they are used only in the context that the creditor receiving the asset is going to have to invest money, participate in the city’s rehabilitation in order to extract assets,” Bennett said.
For example, the FGIC settlement includes the bond insurer, or its development partner, receiving the land where the Joe Louis Arena currently sits, with the provision they will develop the site as a hotel, office and retail space and condos.
City attorney Bruce Bennett, of Jones Day, began his closing argument by pointing out how quickly the Detroit Chapter 9 case moved from filing to trial conclusion … and why the speedy schedule is good for the city.
“Few if any press accounts about this case, and frankly even every article about the city of Detroit published outside the city of Detroit, refers to the fact that the city is in bankruptcy case,” Bennett said. “This isn’t good. It isn’t helping. It doesn’t do much to attract residents and business to the city, which as we’ll see later is extremely important to the city’s overall recovery.”
Finishing the bankruptcy trial is important for the city’s image, Bennett said.
“Even today many people who read articles which have reported the parade of settlements, … don’t fully understand the extent of progress already made or fully understand that the end really is in sight,” Bennett.
He repeatedly praised the relatively short time frame from filing to today’s closing arguments.
“It was a priority very early on for the debtor, the emergency manager, the entire professional team that we were going to put his case on a fast track,” Bennett said. “We think we’ve succeeded in this regard with your help. … The fact that we’re going to have an ultimate conclusion in this kind of time frame is terrific.”
The Plan of Adjustment now is “very broadly consensual” Bennett said, with all major financial creditors supporting it.
“Of course the case did not start out that way. It’s hard to think of any major constituency that was not involved in major litigation concerning some aspects of its rights with the city,” Bennett said.
Before closing arguments began, attorneys for bond insurer Financial Guaranty Insurance Co. and holders of some pension debt reported they had finalized a settlement with the city.
“Just in the nick of time we’ve resolved each and every one of the pending issues. We, did reach agreement on language that reservation of rights language, that would go into the confirmation order,” said Alfredo Perez, FGIC attorney from the Weil Gotshal & Manges firm.
FGIC also filed an updated term sheet, which was read into the record.
Department of Financial Services waived notice period so FGIC has the ability to enter into the settlement, Perez said.
Jonathan Wagner, of Kramer Levin, who represents holders of about $1 billion in pension debt through the Certificates of Participation, said his clients also were now supporting the city’s Plan of Adjustment.
“I don’t think there’s any suspense here but i’m happy to report that we’r withdrawing our objection,” Wagner said. “My two-hour statement is now reduced to zero.”
Detroit is going to scrap its own copper wiring, and the court’s expert witness Martha Kopacz takes the stand today. WDET’s bankruptcy reporter and Next Chapter Detroit blogger Sandra Svoboda has the latest on the bankruptcy trial, and says the end is in sight.
At the conclusion of testimony from witnesses, Judge Steven Rhodes asked which attorneys plan to make closing arguments Monday and how long they would take. Here’s what they said:
For the State of Michigan, Steven Howell, of Dickinson Wright, 30 minutes
For the Official Retirees Committee, Claude Montgomery, of Denton’s, 45 minutes
For the holders of some pension debt certificates, Jonathan Wagner, reserved his right to make closing arguments as his client hasn’t reached a formal settlement with the city.
For the pension systems, Robert Gordon, of Clark Hill, 15 to 20 minutes.
For the Detroit Police Officers Association, Barbara Patek, of Erman Teicher, possibly 10-15 minutes.
Individual objectors, Michael Karwoski and John Quinn, 30 to 45 minutes.
For the city, Bruce Bennett, of Jones Day, 3 hours.
For more information about attorneys and their clients, see “The Detroit Bankruptcy Attorneys”
Judge Steven Rhodes is questioning “his” expert witness: Martha Kopacz, a Boston-based restructuring consultant. He appointed her earlier this year, and she has been reviewing the city’s legal filings, budget reports and financial projections as well as interviewing city officials to determine the feasibility of the city’s restructuring plan.
In the last of her testimony, Kopacz called the exit financing a ship that has sailed and said adjusting it could have a negative effect in financial markets. She praised the five-year collective bargaining agreements reached. “It gets the city beyond this administration,” she said. The stability provided by the contracts help provide more accurate financial projections, which increases the plan’s feasibility, Kopacz testified.
The judge asked Kopacz what advice she would give to the Financial Review Commission, established by the state legislation to oversee the city’s finances. She said:
“I’m not sure I’d give them any advice. I think the formation of that commission is really the most important thing that the state is going to undertake and that it will hopefully support as everyone intends the effective implementation of the plan. Because the state has designated participants and the city has designated participants, whom I believe would look out of the interests of the state and look out for interests of the city, I think it would be advisable if the commission included some more independent, maybe more out of geography sort of individuals that have the requisite skills. … I would hope in the appointed people that they get some diversity of geography and mindset and skills.
Settlements with all creditors who are represented by attorneys and had filed plan objections bodes well for plan feasibility, Kopacz testified.
“It improves the feasibility,” she said. Her July report identified “unresolved issues” related to outstanding creditors. “In the report I filed yesterday, I’ve identified many of those unresolved issues that are now solved. That’s favorable to feasibility,” she said. “But the cost of those settlements has pushed the city to the skinny end of feasibility.”
Judge Rhodes asked Kopacz her opinion on how the state legislation impacts feasibility of the Plan of Adjustment. She said:
“:It favorably impacts my assessment of feasibility because the existence of the financial review commission, the oversight commission I think is a very positive, qualitative factor in ensuring that the city conducts itself in such a way that ensures or helps to ensure the commitments of the plan are going to be met.”
Rhodes asked Kopacz her opinion about the city’s leadership as related to adoption of the Plan of Adjustment. She said:
“I have a great deal of faith in Mayor Duggan and the city council, that they are going to work diligently to implement this plan.”
Rhodes asked Kopacz to give her assessment of city’s workforce and its ability implement the Plan of Adjustment. She said:
“I’ve not dealt with a significant number of the city employees. I have interacted with a lot of department heads, a lot of finance people in departments and probably middle management and up. I think there is a genuine desire to right the ship, to help the city prospect. I think that again that group needs a more detailed plans, more understanding of the changes that are envisioned but I think there is a significant level of enthusiasm at least amongst the mayor, his direct reports and the senior leadership of the city to accomplish in large measure what’s been laid out here.”
She also answered the judge’s question about what system workforce issues exist relative to the implementation of the Plan of Adjustment by saying:
“I think there are system workforce issues around training and having the right people in the right spots. The city is way underinvested in human capital, and I think there will be challenges because of the collective bargaining agreements and the civil service rules in terms of what do you do with an employee who doesn’t have the skills that the city needs going forward so that is something that organizations deal with all the time and is going to have to be effectively managed, but I think for the most part people want to do a good job. I think a lot of people will be excited to learn. They want information systems. They don’t want to wait until 5 o’clock at night until everybody’s off the system to run their report because their reports are too big and they crash the system. Employees don’t want ot live in that kind of environment.”
Judge Rhodes is asking Kopacz about risks in the Plan of Adjustment. Here are a few topics he asked about and what she said.
*If the 6.75 percent interest rate projected for pension fund investments is reasonable. “I would make it 5 percent if I ruled the world,” she said. In a nutshell: the more conservative the better.
*Whether the change in pension benefits and plans affects the bottom line. “The city needs to attract new employees. Whether or not that plan will be attractive to people who want to be employed in the city, long or short term, is left to be seen. How the hybrid plan affects the existing workers in terms of morale and motivation is yet to be seen. It doesn’t have an economic impact, per se, it has an impact on how employees view their role with the city.”
*The level of funding set aside in the city budget for contingencies. “I’m not comfortable with the level of contingency. I would like more than the 1 percent that is factored into these projections. I understand that it may not be possible but it’s a continuing concern. It was a day one concern. But at the end of the day, it doesn’t push me to a point where I think the plan’s not feasible because of it.” Kopacz said she would prefer contingency funding better targeted to the more potentially variable expenses and revenues. “It would be more functional than formulaic and it would be a whole number that would be determined based on some good analysis and conversation,” Kopacz said.
Judge Rhodes asked Kopacz about financial risks that remain for the city. Here’s what she said:
“The good news is that some of the benefits as a result of the restructuring have been fixed at reasonable levels going forward i.e. pension and that sort of thing. Obviously the city still has to susceptibility to changes in health care, which everybody does, that’s just challenging for all employers. Currently the city doesn’t’ have as many employees as it needs, and so there’s a risk that the existing employees are working more overtime. So you probably have an offset there between a lower headcount with some more overtime. I don’t think there is a large risk that the city will get out ahead of its headcount projections so I’m not particularly worried that the city will hire too many people too fast. Against that a two-edge sword in terms of getting the change implemented that needs to happen …
“The other part is really on the procurement side with expense. The other large components of city expenses are purchased services of all kinds as well as things that it buys for itself, like some material and supplies and that sort of thing. Procurement is an area where there was a lot of mischief in the past. I don’t want to get anybody mad at me, but there was a lot of mischief in procurement in the past and the city hasn’t fundamentally changed much of its procurement process although … I do think it’s going to get better. I think the information system, all of those changes, are going to help a lot but the … risk that the whole purchasing side of city expenditures could be higher than expected.”
Kopacz found the city’s revenue projections, used to create the Plan of Adjustment, reasonable. These include:
*Income tax revenues, which are project to grow at about 2 percent annually. Kopacz said those are reasonable. “I actually think they could be conservative, even with the reinvestment initiatives,” Kopacz said. “I think the risk is more external to the city in terms of macro risk, god forbid there’s another great recession or some national disaster that affects the city.”
*State revenue sharing, which comes from the constitution – which is recalculated every 10 years based on population – and statute – which sets standards the city must meet to receive the money. “The city has always received 100 eprcent of what they’re eligible for,” Kopacz said. But projections are thatstate revenue sharing payment will “stay flat,” she said. Rhodes asked her if there were risks in those assumptions.
“I suppose there’s a risk that Detroit would miss the incentive portion of revenue sharing, but I find that difficult to fathom given the current capabilities of the mayor and the financial officer,” Kopacz answered.
*The casino tax revenues, which are assumed to decrease in the near term. “The assumption is that the wagering tax will drop a little bit in the next couple years. It will flatten out and then grow very slowly at a percent a year,” Kopacz said. “I think the projection that’s there now is reasonable.
*An overall savings of $483 million because of better operations. Part of that would come from improvements to revenue collection. “The city does a very poor job of collecting money that it’s owed,” Better technology, Kopacz said, would improve those efforts.
Kopacz testified the city should publicly report how it spends the $1.7 billion, currently proposed in the Plan of Adjustment to improve city services.
“There has to be a scorecard of metrics relative to each of the restructuring initiatives as to how effective those dollars are being spent,” she said. “I think that will give good information, it will give good transparency not only for the review commission but for the citizens to understand how the city is doing in terms of making these reinvestments successful.”
Such reporting, she said, would have two purposes: internal management and external public accountability.
Kopacz also said the city should do “regular reporting” of such a scorecard. “The city should be reporting its progress more than through the (financial statement) that it does once a year. There needs to be a good dialogue between the city, the review commission, the city council in a way of reporting things out that is factual that doesn’t have public relations spin to it. It’s just data.”
Kopacz testified that the Plan of Adjustment, created largely by the emergency manager, is not optimally integrated into the city budget or departmental operations, overseen by the City Council and the Mayor.
“It’s not in the budget and there’s not a robust implementation plan behind it,” she said.
Rhodes asked her if she had spoken to city officials about that.
“I have, and they agree with me,” she said.
Rhodes asked if she had “seen any evidence of movement toward resolving this issue of getting these changes into the budget?”
“Yes, on a department-by-department basis, yes, they are working on that,” she said.
Rhodes asked Kopacz about her opinion of how the 15-month-old bankruptcy process has gone. Here’s what she said:
“The speed of this proceeding has been a two-edged sword. The good side of that is that in little more than a year, the city will have gone through a massive restructuring process and will have significantly de-levered its balance sheet. Going from in excess of $10 billion to less than $4 billion is a huge de-levering of the city and that’s a really good thing. But because the focus has been on the bankruptcy and the speed in getting that done, there has not been until recently as much energy put into restructuring the operations of the city. Functionally, the city operationally was broke, and that’s evident in that it’s service delivery insolvent. I believe the emergency manager had to pick one of two options. The focus was on delivering not fixing the operations. That as one way the speed cut against necessary, long-term things which will now have to be accomplished outside of the bankruptcy which could be more difficult to achieve than inside the bankruptcy with the power of the Emergency Manager.
“The other part of that is the speed and the bilateral negotiations with the mediators. The city and the counterparties, in having all of those bilateral and none of the multiparty sorts of things, really created a win-lose situation where the parties were always coming back to the city for more and more … where as in a longer process, if there had been more time for the counterparties and stakeholders to really get and understanding of the city’s needs to fund investment going forward and what its real cash flows were, I think we would have been able to reach settlements where maybe we weren’t as close on that continuum of feasibility as we are today.”
Kopacz says the city’s Plan of Adjustment is “feasible” with “reasonable” financial projections. But she has not yet been able to fully review the latest draft Plan, filed yesterday with updated projections after recent settlements and additional revenue sources including parking revenue. Kopacz said she reviewed the 10- and 40-year projections, provided by city consultants but had not yet analyzed the restructuring and reinvestment initiatives (which total about $1.7 billion) and the triennial budget, provided by city staff.
Her overall analysis of the Plan of Adjustment included “quantitative and qualitative” work, that evaluated whether the city had the “skill and will” to implement the plan.
Rhodes questioned whether the city’s plan to issue $632 million in B notes, payable over 30 years with interest-only payments for the first decade, was reasonable. Kopacz said she believed the city could repay those.
To reflect its settlement with bond insurer Financial Guaranty Insurance Co., the city of Detroit filed an updated Plan of Adjustment today. It’s a draft, so it will be updated before the confirmation hearing ends next week.
Today’s testimony includes witnesses who will shed light on the city’s settlement deal with Financial Guaranty Insurance Co., which includes a development agreement for the Joe Louis Arena site, as well as other settlements.
Court is done for the day. The bankruptcy trial resumes tomorrow with testimony from the court-appointed expert witness. Her initial report can be found here. She’ll discuss the feasibility of the plan’s financial and administrative assumptions.
Judge Steven Rhodes as Emergency Manager Kevyn Orr the value of the development agreement that’s part of the city’s settlement with FGIC.
Orr first said he wasn’t sure he could answer without violating the confidentiality requirements related to the case’s mediations.
“Ultimately I’d like you to testify either what the value of the real estate is FGIC has an option to acquire here or tell me the city doesn’t think it’s necessary for the court to have that to determine the reasonableness of the settlement. If your answer is that, then we have to have a discussion about why that would be,” Rhodes said.
The court took a break for Orr to consult with the city’s attorneys.
When his testimony resumed, he said, “The Development Agreement is related to the invalidity litigation (for the Certificates of Participation pension financing), and right now that property has no current value or even negotiated value because it has to be demolished and remediated before it can be developed,” Orr said.
Judge Rhodes replied, “Just to translate that into slightly different language, the city’s position is that the costs associated with attempting to market all of that property either equals or exceeds what the city could sell it for in the market?”
“Yes,” Orr said, “Because you have to demolish it. You have to remediate it, so that’s true, your Honor,” Orr said.
As part of the bankruptcy financial restructuring, the city of Detroit is contracting with Hilco Industrial company to sell some city vehicles and equipment.
In his testimony this morning, Detroit Emergency Manager Kevyn Orr said the list includes buses, trailers, pick up trucks, cargo vans, floor scrubbers, sweepers, a dump truck, a crane, a backhoe, a surface grader and other items from several city department.
He did not testify about how the sale would proceed.
Orr said the deal the city reached with bond insurer FGIC is a “global settlement,” in part because it resolves litigation involving the pension Certificates of Participation and avoids future litigation.
“We are resolving some fairly heated litigation with FGIC over some large sums of money,” Orr said.
Provisions in the settlement prevent litigation between FGIC and other parties, including the pension systems, involved in the deals.
“We’re trying to provide finality in all of our agreements and transactions if we want ot be a good development partner with FGIC. We do not want any third parties to be embroiled in litigation,” Orr said. “Rather than buying more litigation going forward, we’re trying to bring and end to all of that potential at this point and go forward, focusing more on the upside, the sustainable and economic development of the agreement going forward.”
Orr now is testifying about FGIC’s involvement with the city’s Certificates of Participation pension financing. FGIC insured about $1.1 billion worth of the deal. In a January lawsuit, Orr challenged the legality of the deal, which allowed the city to borrow money for pension financing above the legal debt threshold.
Under questioning from city attorney, Greg Shumaker, of Jones Day, Orr said the bankruptcy settlement with FGIC means the city will drop its suit, saving the city substantial legal fees. “This was going to take at least several years,” Orr said. “I anticipated that it was going to be complex, both factually and legally, under some of the theories for several reasons. One, it was pretty clear that both parties were going to be killing a lot of trees in terms of throwing a lot of paper back at each other. I’m familiar with the counsel representing FGIC. … They’re quite capable. They will represent their client zealously within the bounds of the law.”
If FGIC had prevailed in the suit, Orr said, the bond insurer could have had a claim to pension funding.
“It would have been fairly catastrophic,” if FGIC had won the case, Orr said.
Detroit Emergency Manager Kevyn Orr is back on the witness stand, describing how the FGIC settlement came about following mediation discussions. “They began in earnest a week or so after the Syncora settlement and picked up speed the last three weeks or so,” Orr said. The federal mediators, including Chief U.S. District Judge Gerald Rosen, were involved, as well as Mayor Mike Duggan.
“I made a pledge, which I wanted to keep, with the mayor to work with him and his team to go through an effective transition,” Orr said. “I felt I no longer had the authority under the statute to deal with city property, but I felt as a matter of prudence, it was important to have the mayor’s team involved.”
Gov. Rick Snyder’s controversial staff member, Richard Baird, also was at the table, Orr said, because the city did not have much left to offer the bond insurer in a settlement on their $1.1 billion claim.
“It became clear that something of that value as going to have to be in-kind as opposed to debt or cash, and we were going to need the state to provide certain kinds of programs,” Orr said.
Also new in the city’s restructuring plan, Malhotra testified that the city could reap $5 million next year from selling 13.5 million pounds of copper wire — $25 million over six years — as the public lighting department is decommissioned. “It’s the wire that exists both overhead and underground,” Malhotra said.
Judge Rhodes asked Malhotra about the $55 million he’s being asked to approve in exit financing, as part of the city’s Plan of Adjustment, and whether the city would actually pay that when it emerges from Chapter 9.
“Based on all the discussion I’ve had with the CFO of the city (John Hill), the $55 million is being paid off (to Limited Tax General Obligation Bond holders) at the exit,” Malhotra said.
Judge Rhodes then asked, “Do you have an opinion about whether that payment of $55 million instead of bonds is in the city’s better interest?”
Malhotra said paying it off over time, through bonds, would cost the city more because of interest that would be attached to that. “In my view at least, the city has the capacity under its proposed exit financing to pay off the $55 million,” he said.
“It’s debt versus debt.”
During his testimony, financial consultant Gaurav Malhotra reviewed the city’s Plan of Adjustment’s $632 million in new “B Notes” to be issued to creditors. Here’s the distribution of those settlements:
$493 million to Other Post-Employment Benefits for Retirees (health care, for example) -
$74 million to FGIC – 12 percent of total
$23.5 million to Syncora – 4 percent of total
$17.3 million to Limited Tax General Obligation Bondholders – 3 percent of total
$3.7 million to Downtown Development Authority – 1 percent of total
$21 million to other unsecured creditors – 3 percent of total
The B Notes will be held by OPEB, the COPs holders and other unsecured creditors. Interest will be 4 percent for first two decades, growing to 6 percent for the last decade. They are interest-only for the first 10 years.
Gaurav Malhotra, a consultant with Ernst & Young, is reviewing some of the terms of the FGIC settlement. He says the New York-based bond insurer’s recovery is 13 percent, including $141 million in new notes and $20 million in “settlement credits.”
With additional settlements reached with the city’s creditors, Gaurav Malhotra is on the witness stand. Again. (He appeared at Day 12 of the trial.) Malhotra is principal and senior managing director in the restructuring practice at Ernst & Young in Chicago. His initial role when he began working with Detroit three years ago was to assess the city’s short-term cash flow situation. In Spring 2013, Ernst & Young’s role changed to look at longer-term financial projections for the city.
After today’s first witnesses finished testifying, Judge Steven Rhodes addressed city attorney Bruce Bennett, of the Jones Day law firm, who will be making the closing argument next week.
Here’s what Rhodes told Bennett he wants to hear at that time:
“I asked parties, counsel, to brief the meaning and operation of Section 943 (b) 3 of the Bankruptcy Code. This is the section that deals with the reasonableness of fees and how this works in this context. So I want you to be fully prepared to discuss that section with me and how it can work here.
“I need to know specifically which settlements the city is asking the court to approve and whether approval of exit financing is part of the city’s request at that stage also, and I’d like you to spend as much time as you think is necessary on the issue of the justification for the discrimination among the classes of unsecured creditors.
“At the same time, however, while you do that, I want to indicate to you that I’m less concerned about the numerator and denominator than I am about the business side, the business justification side of that analysis.
“If anything further occurs to me in the meantime, I’ll try to let you know.
Parking consultant Gerald Salzman testified about various models of ownership for the city’s parking “assets” — garages and metered spaces. A few highlights:
*Four models were considered, some of which included privatization.
*An additional 370 meters are possible.
*Revenues will decline after 2018 when the Joe Louis Arena garage is transferred to bond insurer FGIC or its developer.
Here are the seven city-owned parking garages, their addresses and their capacity:
Ford Underground, 30 E. Jefferson, 723 spaces
Grand Circus, 1600-1601 Woodward Ave., 821 spaces
Joe Louis Arena, 900 W. Jefferson Ave., 3,200 spaces
Millenium, 432 W. Congress St., 595 spaces
Premier Underground, 1206-1208 Woodward Ave., 895 spaces
Eastern Market, 2727 Riopelle St., 300 spaces
Cultural Center, 41 Farnsworth St., 350 spaces.
Meanwhile, The Detroit News’s Robert Snell is reporting one more financial group is close to a deal. The COPs holders are the parties that own the Certificates of Participation issued in the now-infamous pension debt financing deal.
ALERT: COPS holders’ lawyer expects to sign off on #Detroit’s bankruptcy deal with bond insurer FGIC within 48 hours.
— Robert Snell (@RobertSnell_DN) October 21, 2014
The first witness is Gerald Salzman, who works for Desman Associates, a parking and transportation consulting company that examined Detroit’s garages.
A team of 10 engineers did a conditional assessment in the city’s parking garages, examining the concrete’s condition, structural integrity and other features, Salzman said. On the financial side, Desman developed a financial model based on data from the city and their own verification based on inventory, occupancy counts of cars in the garages