Detroit residents are determining how to move forward after the elimination of Citizens District Councils (CDCs). CDCs have been around since the Blighted Area Rehabilitation Act of 1945 granted Michigan cities the right to acquire blighted properties using the power of eminent domain. But last month—in one of his final acts as the city’s fully-empowered emergency manager–Kevyn Orr issued an order abolishing CDCs in Detroit. The move came as a surprise to many and provoked mixed reactions from people involved in community-based development in Detroit. Our Detroit Journalism Cooperative Partner Michigan Radio has this report.
The city’s creditors who are objecting to the bankruptcy restructuring plan are now presenting witnesses, starting with Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System. Earlier today, Detroit City Council President Brenda Jones and Mayor Mike Duggan were on the stand as the city wrapped up its presentation of witnesses in the bankruptcy trial. We’ll have updates throughout the day.
The trial is adjourned until Tuesday, Oct. 14. Judge Rhodes thinks closing arguments will come the week of Oct. 20.
At the end of Thomas’s testimony, Judge Steven Rhodes asked her some questions. Here’s part of their exchange:
Judge: Why do we have an unfunded liability in the city of Detroit for its two pensions?
Thomas: I believe the biggest contributing factor was in 2008, the crisis, the tremendous losses we suffered on our investments. We have an aging workforce. We’re called a mature plan where the retirees are like twice as many as the active employees so you have less contributions coming in and more benefits coming out.
Judge: Is it fair to say that in the years of that recession, whatever they were, the actual returns were less and in some significantly less than the assumed rate of return.
Yes, that’s fair.
Judge: Is it also fair to say that it’s the city who bears the risk and the responsibility when that happens?
Thomas: That’s a fair statement.
Judge: If the assumed rate of return is lower, like 6.75 percent compared to 7.9 percent, is the city’s risk that it will incur unfunded liability lower or higher, all other things being equal.
Thomas: The city’s risk is higher.
Judge: Explain that to me I thought it was the opposite.
Thomas: If the assumed rate of return then the city’s risk of having to contribute more is higher.
Judge: Based on your experience with these two pension plans, do you feel you are qualified to judge the reasonableness of the rates of return of a pension plan.
The last time the Detroit pension boards changed the asset allocations of the roughly $6 billion they oversee was in 2013, Thomas testified.
“There will be no changes until the plan is actually confirmed. There have been some discussions with the investment consultants taking into consider the changes the POA will bring but they aren’t going to make any changes prior to that. To do it efficiently you really have to plan to transfer assets of that size,” Thomas said.
The pension boards are supporting the Plan of Adjustment because of a settlement reached with the city in April.
Individual objector Michael Karwoski is questioning Thomas. He filed this objection and 98 people filed joinders. His questions are covering pension fund governance, investment interest rate assumptions and the annuity savings fund recoupment.
The city’s pension funds since March 2013 has used a 7.9 percent interest rate in forecasting returns on investments. “It’s a rate that was set with information from our actuary, asset consultant, our attorney, restructuring counsel, trustees,” Thomas said.
The city’s Plan of Adjustment uses 6.75 percent, and attorneys for financial creditors are arguing for using a higher rate. The higher rate would mean the pension systems are better funded, based on the projections, and should translate to fewer city financial obligations and lower cuts to other creditors, their attorneys say.
The 6.75 percent figure was reached during mediation and was proposed by the city’s actuarial firm, Milliman. (The pension systems and the Official Committee of Retirees, the court-mandated group, also have actuarial firms.)
Thomas testified that Milliman has not asked her any questions about the system. She was asked about certain procedures as part of the bankruptcy process. The city set up a Pension Task Force but did not tell her about it nor ask Thomas or any staff to join the group, according to her testimony.
Thomas was asked about this interview during her time on the witness stand.
The city is done making its case, and the “objectors” have called their first witness: Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System.
After creditors and city attorneys questioned Duggan, Judge Steven Rhodes had his turn. He asked about the proposal for up to $325 million in exit financing that’s in the Plan of Adjustment and he must decide whether to approve.
Here’s a portion of their exchange:
Judge Rhodes: A substantial portion of that borrowing is for purposes of paying the obligations to creditors under the Plan, You understand that.
Duggan: I do.
Judge Rhodes: There is however a piece of that that’s not for that purpose, it’s for other purpose in relations to city operation and these restructuring initiatives. … My question is what is your judgment on the need for that financing for these purposes in this second group, the city operation purpose and the reinvestment purposes?
Duggan: Your Honor, I’m probably going to get myself in trouble with the people I have to go back to the office with. I had extensive conversations with (court expert Richard) Ravitch about this and extensive conversations with (city CFO) John Hill about this, and I believe we need to keep the exit financing to the lowest possible amount. One of the troubling things we have seen is a $50 million overrun in consultant fees. I don’t think it’s a coincidence we’re going to get up to $50 million in the exit financing and the amount we’re seeing, $50 million in consultants’ fees. I’d be very disturbed if we had to borrow $50 million in consultant fees because the consultants didn’t stay on budget. John Hill thought $275 million was reasonable.
Judge Rhodes: It was explained to me that the reason for the increase was the settlement with the limited tax general obligation bond creditors that involved a cash payment to them of approximately this amount. Do you know anything about that?
Duggan: That’s the first I’m hearing about it.
Judge Rhodes: Am I right? That’s what was explained to me?
Thomas Cullen (a Jones Day attorney working for the city): Yes, your Honor, it was explained that was part of it, the decision to retire that note.
Judge: Well, I don’t want to put you on the spot and if you’re not able to answer this question, that’s fine with me. But if that’s the purpose of this additional borrowing is to fulfill a settlement obligation, is that something you could support?
Duggan: Your Honor, you’re beyond my expertise on that. I would defer to John Hill whether that extra $50 million is needed or not. I know philosophically he believed as do I that we should keep this borrowing as low as we can.
Here are the last updates from Duggan’s testimony under questioning by city attorneys:
On the inclusion of the Financial Review Commission in the grand bargain legislation:
“There was no way the grand bargain legislation was going to pass without a financial review commission,” Duggan said.
On what he sees as the risks of the Plan of Adjustment and the restructuring initiatives:
“For the most part, I worry about things that are outside of our control,” Duggan said. Those include suburban casinos that would cause a decrease in the city’s annual $170 million it collects in taxes from the three downtown casinos and a decrease in state revenue sharing dollars. The plan projects a steady rate of that money.
“It’s going to be really hard work to make sure that happens but those are things that I signed up for and I’m going to work really hard at them every day,” Duggan said.
Here are a few more highlights of Duggan’s testimony.
On the proposal from financial creditors to sell Detroit Institute of Arts assets to raise funds:
“There’s a feeling of hope in the city. … To take the art institute out, it’s such a centerpiece of the city I think it would be a huge negative for our image. I think it would be a huge negative for people’s decisions and I think it would plunge the city into the kind of anger and turmoil that we’re trying to get away from.
On the possibility of raising taxes in the city:
“There’s no more inefficient way in the city of Detroit to collect tax revenue than in the property tax,” Duggan said.
In addition, he said, there isn’t much money to be gained as one mill of property tax raises only $7 million.
On negotiations in the bankruptcy case:
Duggan was involved in the mediations regarding the Syncora settlement and the creation of the regional water authority.
“With the exception of those, I’ve had very little involvement in the other settlements,” Duggan said.
City attorney Thomas Cullen, of the Jones Day firm, questioned Duggan during the direct examination portion of the mayor’s testimony. Cullen asked Duggan to give a summary of his opinion on the Plan of Adjustment. Here’s what Duggan said:
“I support this plan and I believe it is feasible. I can’t predict a national recession. I can’t predict state revenue sharing cuts. I can’t predict casinos being approved but those are the risks I signed up for as the mayor. But I believe in this plan there are resources to be successful if we’re aggressive, we work hard and we don’t have any serious misfortune that’s outside of our control.”
Despite the many improvements made during his tenure, city services aren’t at the optimal level, Duggan testified.
“We’re probably about 10 percent of where we need to be,” he said. “There’s a lot but we’re building gin the right order. It’s going to be a multi-year process before people get the kind of services they deserve.”
Here are a few more highlights from Duggan’s testimony:
On transit: “If Detroiters are going to have opportunity to go to work and school, we’ve got to have transit,” Duggan said. “Three quarter of the buses are approaching the age of retirement.” A federal grant, announced last month, will provide $26 million for Detroit Department of Transportation improvements. “The city is hiring more drivers and will hire more transit police officers,” he said. “We’re are going to put out a schedule that we are going to honor.”
On the roughly 275 parks the city owns: “In 2013, the city maintained 25 of them on a regular basis,” he said. Today, that number is 180. “It was good but it wasn’t enough,” he testified, so Duggan reached out to churches and businesses, and they adopted 75 parks. The groups mow the parks every 10 to 14 days and pick up trash three times a week.
He said that effort is part of a new philosophy beginning to emerge in Detroit: partnering with city government, “not expecting city government to deliver all services.”
On the 100,000 vacant lots: Some had not had grass cut since 2010, which Duggan called demoralizing. “If you’ve got a neighborhood with a few vacant lots, usually the neighborhood will pitch in and cut it,” Duggan said. But when there are several, it becomes overwhelming. Duggan said the city started mowing this year.
“We cut them all once and now we’re halfway through the second cut,” he said. “If you drive through the city today the vacant lots are in far better shape than they were a year ago. These kinds of things are significant factors in people’s decisions about whether they’re going to stay.”
Duggan testified that the negotiations for the recently ratified collective bargaining agreement with the Detroit Police Officers Association demonstrate how the Plan of Adjustment will guide the city’s operation.
He said he talked to Emergency Manager Kevyn Orr about changes he wanted to make in the police department. “He said, ‘if you can work out a deal within the dollars of the Plan of Adjustment, go ahead,’” Duggan testified.
The deal, announced last week, includes a base pay raise of 8 percent. Duggan said money was available because of reductions in sick days from 17 to 12, the elimination of the retention bonus and the replacement of uniformed officers in traffic, prisoner transport and crime statistics positions with retired officers who would not need benefits.
It was ratified 80-20, Duggan said. “The officers now know they’ve got an immediate 8 percent pay increase and we’ve got the ability to bring back retired officers to paid position ad you’re going to see us be able to effectuate the Plan of Adjustment by putting more officers back on the street,” Duggan said.
A few highlights of Duggan’s testimony so far:
“One person doesn’t do a turnaround. You need to recruit a strong and deep team in order to deliver services to the public … You’ve got to plan two or three years ahead because you never know what’ coming up in the state of Michigan economically.”
After he was Wayne County Prosecutor, Duggan became head of the Detroit Medical Center, which was in dire financial straits. “When I came in, we have 15 days cash on hand,” Duggan said. “The bankruptcy attorneys had already been hired.”
Like Detroit, the DMC had problems with service delivery and leadership turnover. “We really had to rebuild the team from scratch,” Duggan said.
Gov. Rick Snyder approached him about being the emergency manager of Detroit. “I told them I didn’t agree with the principle of an emergency manager and I wouldn’t be interested, but I started to think what’s the alternative,” he said. So in late 2011, he said to his wife, “Let’s move back to the city. Let’s see what happens.”
His tenure at the Detroit Medical Center was “the most powerful” of his life, Duggan testified. “If there’s any place in the country where we’re getting past the racial divisions, it’s in an urban emergency room,” Duggan said. “I started to think it could be possible that we could break across the barriers in other parts off the city. I really felt like if I could meet everybody in the city we could get past those racial divisions.”
Mayor Mike Duggan is on the witness stand.
Judge Steven Rhodes had his own questions for Jones.
Judge: As you know, the plan does not provide for a public sale of the art at the Detroit Institute of Arts. Do you have a position whether the art at the Detroit Institute of Arts should be sold to pay creditors of the city.
Jones: My position is per the city charter, the city should provide art and culture to the citizens of the City of Detroit and the art, protecting the art and the DIA is helping to follow the city charter of the city of Detroit.
Judge: What is your understanding of why the city charter has that provision in it?
Jones: Because the citizes of Detroit need culture and art provided to them. The citizens cry all the time about the taxes they are paying. The need something just outside of paying taxes as cultivation of the city.
After city attorney Greg Shumaker finished about 30 minutes of questioning, Jonathan Wagner cross examined Jones. He’s an attorney for the holders of the Certificates of Participation (COPs), the controversial pension funding deal. He asked about the funding level of the Police and Fire Retirement System, where Jones is a trustee. The system issued a statement in March 2013, saying the plan was 96 percent funded. Today that figure is 89 percent.
Attorney Ed McCarthy also questioned Jones. He’s an attorney for Financial Guaranty Insurance Company, which has a roughly $1.1 billion claim in the case as the insurer of the COPs. He asked about the $1.7 billion in the city’s Plan of Adjustment for city services, known as the Restructuring and Reinvestment Initiatives (RRI). “The city council and the mayor to the best of their ability will implement the allocation of the money that is in the RRI,” she said. Through his questions, McCarthy pointed out the City Council had not reviewed the value of the Detroit Institute of Arts collection, the economic value of the museum to the city, the number of annual visitors it has and other subjects before the council voted to transfer the DIA assets to a nonprofit, as part of the Grand Bargain.
After McCarthy, Debra O’Gorman questioned Jones. O’Gorman represents the Macomb County Public Works Commissioner Anthony Marrocco, who has a $26 million claim against the city related to a pending lawsuit over the Macomb Interceptor Drain Drainage District.
Here are some highlights of Jones’s testimony.
On pensions being cut as part of the bankruptcy settlement:
“When you work a job and you look forward to retiring, you look forward to the dollars that you will have to care for yourself and your family, to know that your pensions will be drastically cut and the money you expected to receive you will not be receiving, that definitely has an effect on you.”
On the Financial Review Commission:
“They will make sure the council and the mayor are doing what we should do to make sure we stay on track. … I was not at first in favor of it. There were some concerns on council of not having a role or not having a seat on the financial review commission and there were concerns about the amount of work council would be doing with them.”
On the original structure of the Financial Review Commission (which did not include a member appointed by the Detroit City Council, as it does now): “All nine council members went up to Lansing and talk to the legislators as well as to testify that we felt council should have a seat on the financial review board,” Jones said. “Having someone look at the work we do and approve it for 20 years. We felt that if we could show we could do our job,… then the oversight commission should go dormant and not come in unless we can’t do our job which we felt we could.”
On how council and the mayor will work together post-bankruptcy:
“We will continue to collaborate and talk about the things the city needs to have adequate services. I’m sure he will collaborate with my colleagues to make sure we have no deficit and to make sure the budget is met.”
On how bankruptcy will change Detroit:
“I’ve been on council for nine years. I’ve watched the city fight to see do we pay Peter or do we pay Paul. Now we’ll be able to know who we’re paying and be able to have the money to pay them and be able to give the citizen services they deserve to have as a tax-paying citizen of the city.”
Jones answered questions about whether she agreed with the bankruptcy filing. “I felt the bankruptcy could have been done by the city themselves rather than have an emergency manager there,” she said, adding she eventually changed her mind. “As we have progressed through the stage, and I have seen the progression that has taken place, I’m happy with the progression and the level of services the citizens are seeing. I think it’s helping to improve the city,” Jones said.
City services are a popular conversation topic in Jones’s life. “I cannot go into a grocery store to go shopping, I cannot shop without a resident telling me about the level of services they have in the city of Detroit,” Jones said. “They are saying that the services are not adequate.”
City attorney Greg Shumaker, of the Jones Day law firm, is questioning Jones, who is an at-large member of city council. City Council Members Saunteel Jenkins, Andre Spivey, Gabe Leland are in the audience.
Jones says others will come after committee meetings. Jones says the mayor and the council have a good relationship. Shumaker asked her about the emergency manager. “I am happy to say Kevyn Orr and I have a good relationship, now,” Jones said, which was followed by courtroom laughter.
Shumaker asked her if there was a time it was “less than good.” “I would not say it was less than good I would just say that we did not have a communication,” Jones said. She identified blight and public safety as the biggest problems facing Detroit, and said the city’s service delivery is “improving.”
UPDATE: Roger Penske testified, and we had our first individual objector question Detroit Emergency Manager Kevyn Orr.
At the start of the morning, after discussions about the court schedule and witness order, Detroit Emergency Manager Kevyn Orr was back on the witness stand. Attorneys for bond insurer Financial Guaranty Insurance Company will skip their cross examination of him, but Judge Steven Rhodes will ask questions. Court is only scheduled to run until 12:30 p.m. today. We’ll have updates until then.
Miller Buckfire investment banker and city consultant James Doak, currently testifying, supports the portion of the Syncora deal that includes the company’s operation of and investment in the Grand Circus Park garage.
“The city gets further private sources to revitalize the city,” he said.
Doak said the garage has great potential but needs an outside investor to make the improvements and manage the operations. “The objective factor that I would cite at that level is everything we’ve seen to date does not suggest the parking department can do that. We’ve had difficulty getting adequate due diligence from the parking department, trying to get information,” Doak said.
In addition, the garage doesn’t have a lot of value in its current condition and will benefit from the renovations, part of the deal with Syncora.
“Our preliminary conclusion with regards to this garage is it’s one of the worst cases, poorer garages as far as its current circumstances. It clears only half a million dollars a year and it has been sorely undermaintained, and we estimate based on (a consultant’s) work that it will require over $13 million of remediation over the next 5 years to fix the structure of the facility.”
City attorney Thomas Cullen, of Jones Day, asked Miller Buckfire investment banker James Doak about whether city-owned land, one of the assets listed in the city’s Disclosure statement in the bankruptcy case, could be used to raise money.
“City-owned land was not going to produce material value in the restructuring process in a way that would materially affect the outcome of the restructuring process. The values were insufficient for Miller Buckfire to devote restructuring energies to marketing this land in small or large swaths, as it would be, and the existing infrastructure or infrastuctures that was getting designed to monetize or otherwise push land back into the private market would be better suited for the task at hand, things like the Land Bank … working with the DEGC,” Doak said.
He said the development agreement was a fair deal for the city and did not provide Syncora special treatment.
“There’s no sweetheart deals in this,” Doak said.
In his testimony, Miller Buckfire investment banker James Doak reviewed a list of assets the city provided to creditors that it might be willing to monetize in “value-enhancement opportunities,” as they say in court. The list included: the Coleman A. Young Airport (also known as City Airport), the Detroit Windsor Tunnel, city-owned land, parking operations and Joe Louis Arena.
For all of the assets, Miller Buckfire “evaluated the natural buyer pool that could be expected to engage with the city and come to a successful conclusion with regards to a transaction,” Doak said. The city’s creditors in the bankruptcy case were considered as potential buyers.
Doak testified about the Syncora settlement, which includes extending a lease to operate the Detroit Windsor Tunnel to a Syncora subsidiary. Doak called the arrangement “a reasonable exercise of the city’s business judgment.”
He also said the tunnel is an unusual, if aging asset, and there were other challenges realizing how the tunnel could be monetized in the bankruptcy case. “We also immediately encountered a tremendous absence of information at the city. The city was only entitled to receive summary audited financials from the company and the lease calculation on an annual basis, and the tenant had no obligation to provide carbon copies once it had already sent those materials on,” Doak said. “The city could only monetize its half of the tunnel and it could only do so after the current leases expired.”
He said no other businesses expressed interest in the tunnel operations.
The agreement with Syncora provides for the city to get more information about the tunnel, its condition and its problems. Under the current arrangement, negotiated during the Kwame Kilpatrick era, the city lacks information about the tunnel.
Doak did his own research in analyzing the deal.
“According to the Customer Officer that I discussed this with, it leaks occasionally. The status of the membrane, which would be expected for a tunnel of this age, is one that must be constantly maintained and examined, and it’s reasonable to expect, and we’re aware of that, that will be something that the parties continue to focus on as well as other elements of the tunnel, including the ceiling element.”
Let’s go back to Orr for a minute and catch up on the last question Judge Rhodes asked him: Why not monetize the art?
Here are excerpts of Orr’s answer:
“Your Honor, some of the discussion yesterday showed the evolution, in fact some of the email from where we started to where we are now in addition to my understanding that under PA 436, the state (emergency manager) statute, in addition to Section 904 of the Federal Bankruptcy Code, the debtor is not obligated to monetize anything.”
“I do believe a one-time sale of city assets, even of cities in distress, is detrimental to the long-term business of the city, particularly the Detroit Institute of Art. That is one of the most significant cultural institutions, and I believe sincerely it would harm it irreparably (if art was sold.) The millage would be revoked. Other museums would not do business with the DIA, both nationally and internationally, maybe not forever … My understanding is that the endowment effort they had has taken a bit of a downfall as people wait to see what’s going to happen. There would be harm from a one-time sale of assets.”
“A one-time sale would be very problematic.”
“Although there have been other discussions about selling the art … the grand bargain that we pulled together through the mediation process … provide some value that I did not have at the beginning of this.”
Another Miller Buckfire investment banker is on the witness stand: James Doak. He’s the firm’s managing director and is being questioned by city attorney Thomas Cullen, of the Jones Day firm. They’re discussing, in hypothetical and theoretical terms, how municipalities or corporations in bankruptcy determine whether to sell assets.
After pensioner Estella Ball finished questioning Orr, Judge Rhodes allowed her to testify for five minutes. Here are some highlights of what she said:
“I really feel nobody is representing the true city of Detroit … There have been so many adjustment, I admit I’m lost but one thing I am opposed to is the third party relief of the state of Michigan. I believe there was collusion from the state to send the city into bankruptcy by state officials and other powers that be. … Through state policies they decided to give Detroit a push over the edge and when we still didn’t fall over they sent Mr. Orr in to push us over the cliff. “
She called the emergency manager a “public king lording over the city of Detroit, usurping the power of elected officials, negating my right to vote.” The emergency manager era, she said, will continue “the oversight of the state over every aspect of the city of Detroit for decades, making Detroit a feudal city under the control of people who do not live here.”
Ball also criticized the number of contracts to consultants and private contractors.
“Very few are Michigan companies and very few are Detroit companies,” she said. “The bottom line is that this is a redistribution for the resources of Detroit into the hands of persons who do not live in Detroit. No matter who I vote for or who wins the election, it is of no effect. This is a violation of the Voting Rights Act.
The bankruptcy case’s effects, she said, “smack of the Jim Crow laws. They will have the same devastating effect on people of color that they did hundreds of years ago. I understand these questions are not necessarily before the court,” she said.
Retiree Estella Ball was the first of the individual objectors – people without attorneys, representing themselves – to appear at the trial. She questioned Orr, mainly about the Plan of Adjustment’s provision that recoups certain annuity monies from pensioners.
Here’s a previous post about the Annuity Savings Fund recoupment, as it’s commonly called.
Ball asked Orr why it was necessary to collect the money from pensioners. He gave an example of how the annuity funds were credited with higher interest rates than they actually earned, with the difference being paid from the pension funds.
“In the year 2009, I think the (annuity) fund actually lost 19.7 percent but it was attributed 7.9 percent (gains) so that’s almost a 28 percent spread. So for instance, that one year, if there was a $10,000 investment, it was worth $8,000 but it was attributed at almost $11,000,” Orr said. “The thought was in the general principles of receivership, you try to recoup an amount of funds that were improperly distributed to the beneficiaries.”
In response to a question about why Roger Penske testified, he was originally listed as a city witness for the topics of Plan of Adjustment feasibility, the importance from a business and investment standpoint of the City’s ability to capitalize and build on the efforts contemplated in the Plan post bankruptcy, the importance and effect of addressing in the Plan, among other things, the City’s blight, public safety, and urban revitalization.
Here’s what Penske said about Detroit’s bankruptcy:
“We have to do it in order to get our city back to where it needs to be for people to live and work.”
Penske on a meeting with Mayor Dave Bing, where the mayor asked business leaders for help cleaning up parks and providing police cars and EMS units:
“After that meeting, I talked to the mayor and said I felt I could be a catalyst to go out in the private sector and get 100 police cars and also 23 EMS units. I’m happy to say with seven or eight phone calls, people said yes. In August last year, we started delivering the 100 police cars and 23 EMS units. We supported with capital and there’s also a piece that’s being funded over time and we’re supporting that with guarantees to the banks.”
When asked about the Grand Bargain, here’s what Penske said:
“The Grand Bargain, from my perspective, is really an umbrella. We’ve been able to take the pensioners, who have worked for the city, and take our gem, the art museum, and put them under one umbrella and find a way to fund the pensioners and keep the art assets in ownership and not have them sold to help us exit from bankruptcy. I feel good about it personally. … It’s a great opportunity to see the unity of the art assets and also the human capital assets, who have worked in the city before, as we go forward.”
City attorney Robert Hertzberg, of the Southfield-based Pepper Hamilton firm, is questioning Roger Penske, chairman of the Penske Corp.
He described his business as a “transportation service company in leasing and retail automotive,” with 40,000 employees and $18 billion in revenue.
Penske chaired the city’s Super Bowl efforts in 2006. He testified the event was the beginning of the downtown renaissance. “It started to bring people together. We have a thousand volunteers and people who really cared about the city,” he said.
Judge Rhodes asked Orr about the settlement with bond insurer Syncora, which provides for several development opportunities in prime areas of the city. The Bermuda-based company was one of the most aggressive adversaries in the bankruptcy case until the deal was reached last month.
Judge Rhodes: The Syncora development agreement appears to intensify and broaden the relationship between Syncora and the city. DO you have a sense as to how that relationship will be monitored and executed on the city’s side of it?
Orr: Yes, I’m hopeful that the marriage is better than the courtship. …
Judge Rhodes started by asking Orr questions about the Financial Review Commission, which would be part of the governance of a post-bankruptcy Detroit for at least 13 years. The state Legislature created the nine-member panel as part of the “grand bargain” legislation passed last Spring.
The commission “will provide a level of oversight that can be flexible according to the discretion of the commission itself,” Orr said.
Rhodes asked Orr about the representatives on the commission, which would include the Detroit mayor and city council president or their designees.
“In the current Financial Advisory Board, there are opportunities for the city to present, which occurs regularly, but there is no representing on that body,” Orr said. ““It was a good idea substantively to have representation from city officials on that commission.”
Judge Rhodes asked Orr about the future dynamics of having city officials or their designees on the oversight panel.
“My opinion is it is not so much dependent on whether the mayor or the city council president sits on the commission – there are nine members, they’re just two – my opinion is, depends on the commission to have access to data and to other department heads and city officials so that they get an unvarnished view” of city finances and operations, Orr said.
The Emergency Manager said he has a “high opinion” of the current city leaders, Mike Duggan and Brenda Jones. “We’ve seen instances in the past where that isn’t necessarily the case,” Orr said.
Emergency Manager Kevyn Orr is expected on the witness stand later today but first up is billionaire businessman Dan Gilbert. Judge Steven Rhodes plans to have some motion hearings after Gilbert’s testimony. We’ll have updates throughout the day as city attorneys continue to make their case that the Plan of Adjustment is feasible and reasonable as a guide for Detroit’s exit from bankruptcy.
Here’s more from Orr’s testimony about settlements the city reached with creditors:
*As a component of the state contribution agreement it was very important to state officials that no retiree be “pushed into poverty,” Orr said. So a portion of the Unlimited Tax General Obligation Bonds settlement was used for an “income stabilization fund” that would be used to restore pensions if they were cut below 130 percent of the federal poverty level.
*The Limited Tax Obligations Bonds had an outstanding amount of about $155 million when the bankruptcy petitions was filed. Like the UTGOs, there was a dispute with bond insurers. Here they were Ambac and Black Rock. “Very similar theories (to the UTGO-related litigation), but LTGOs weren’t able to allege a dedicated millage,” Orr said.
The city also defaulted on LTGO payments in October 2013. The insurers sued the city, claiming there were special liens and other guarantees of payment, according to his testimony. “They had competent counsel who could pursue those claims,” Orr said. “They know how to litigate.”
Orr said he knew the litigation would be intense, lengthy and costly with the bond insurers. “They struck me as highly motivated to go beyond the issue here but to drive that home what they perceived to be the precedential value of the issues in this case,” he said.
Settlement negotiations proceeded.
And that’s where testimony ended today.
In his testimony this afternoon, here’s what Orr had to say about some of the settlements reached in the case:
* All but one of the settlements with creditors reflected in the eighth and latest version of the Plan of Adjustment were reached through mediation, Orr said. “I’m still somewhat amazed we reached some of the settlements we have but I’m not sure we would have reached tem without mediation,” he testified
* Valued at about $388 million, the Unlimited Tax General Obligation bonds were a series of bonds issued by the city that “in the creditors’ view” were backed by a dedicated millage, Orr said. “It was a significant sum of money,” Orr said. “We eventually defaulted on our payment in October 2013.”
Chatter, letters and demands with the bond insurers followed “but eventually they sued us,” Orr said. A settlement was reached. But city attorney Greg Shumaker asked Orr what would have happened if one hadn’t been.
“The litigation just out of the box was pretty vigorous, there was a lot of paper flying back and forth,” Orr said. “It was a pretty heated, contested piece of litigation.”
* No settlement has been reached with Financial Guaranty Insurance Company but Orr hopes to have one.
City attorney Greg Shumaker, of Jones Day (Orr’s former law firm), is asking Orr about the city’s Plan of Adjustment, the blueprint for restructuring debt and operating post-bankruptcy.
The plan reflect settlements, restructuring and reinvestment initiatives that “we worked on,” Orr said.
Shumaker asked him who the “we” was.
“I suppose it’s the ‘royal we’,” Orr replied, getting us our first Big Lebowski reference I’m aware of in the bankruptcy trial.
Orr said he didn’t think the city’s 2013 bankruptcy filing should have surprised anyone.
“From my view on July 18, all of those had been firmly established by the people that live here and work here,” he said. “There have been a lot of costs to the city, the issue was ripe, and it was time to move forward to a reasonable plan so we could get out of this.”
After the bankruptcy petition was filed in July 2013, Orr said he was “forthcoming about the financial condition of the city” and he began negotiating with creditors about to try and resolve their claims.
PA 436 (the state’s emergency manager law), Orr said, required him to restore financial and fiscal stability to municipalities in Michigan that are in financial distress and emergency. But he also decided not to use all the powers the law gave him: replacing pension boards, for example, or seeking approval with an election process to raise taxes.
(That’s an issue that’s been raised by creditors during the trial as an option the city should consider so more money would be available to them.)
“We’re at the maximum tax rate and millage,” Orr said, adding the city is nearly at its maximum legal tax rate, has an impoverished population and has a high unemployment rate. So that option “didn’t seem reasonable.”
Orr said early on he met with labor representatives and heard their concerns about wages, pensions and health care. But since the city paid nearly all retiree health care out of pocket and about 40 percent of the city’s expenses went to legacy costs (pensions, health care and debt service), Orr said he had to deal with costs related to employees and retirees.
“We knew that with the current rate of increase, in the next nine years, legacy costs are going to rise 73 percent,” he said. “Retiree health care would be 50 percent of that.”
Orr said the state’s emergency manager law dictated what he did. “We knew the trajectory of where the city was was not sustainable, and the statute required me to put the city in a sustainable fashion at the end of my appointment,” he said.
Orr also described the hostility he faced when he started as the city’s emergency manager, which coincided with the sentencing of former Mayor Kwame Kilpatrick. “The city has gone through a lot of trauma,” Orr said. “There were a lot of rumors about what I was going to do.”
Those included that he was here to sell off assets or “carry out the ill will of Gov. Snyder,” he said. “There were a lot of animosity, some hostility. Some people would tell me pretty straightforward, using vernacular, they didn’t appreciate that I was in town,” he said.
Orr described a group of people who would stand outside his office with packs of Oreo cookies. “My last name is Orr. I’ve heard that before,” he said. “I’d say, ‘If you brought milk, we’d have a snack.’”
In response to a question from a city attorney, Orr described his relationship with Mayor Mike Duggan. “That has evolved from one that was a little standoffish at the beginning…to one that I think is very professional and very respectful of each other,” Orr said.
Soon after his appointment, Orr said he met with hundreds of stakeholders in meetings set up by the state. Some of those included city creditors, and what they said surprised him.
“I guess with the city’s creditors it was the concept of how many were unwilling to come in and do business with the city,” he said. That had a “deleterious effect on the city’s ability to contact or provide services.”
At some point, discussion took place with the city’s vendors about the financial situation of the city and whether creditors would be paid in full. “Each of them felt their situation was special and they would not be required to take a hair cut,” Orr testified.
Orr’s earliest hires as staff in the Office Of the Emergency Manager included a special assistant, a senior advisor, a public relations director. Then, he said, he convinced former City Councilman Gary Brown to become the chief operating officer. He also hired a chief financial officer, a police chief and a deputy emergency manager.
Orr, who took the stand at 2:45 p.m., said public safety was his first focus when he started with the city. Police and fire both had unacceptable response times, outdated equipment and inferior technology.
Next priorities: public lighting, blight remediation and trash collection.
“Our trash services were poor. The city was trying to deal with solid waste on a regular basis but we did not have the capacity to deal with it throughout the city,” Orr said. “In addition to the blight, you would also see garbage in the streets.”
Two private contractors have been hired. The companies have scheduled regular bulk pickups, automated pick up and
“People on the street have come up to us and thanked us for dealing with trash,” he said.
City attorney, Greg Shumaker, of the Jones Day law firm, asked Orr to describe the condition of city services when he took office in March 2013.
“The city’s core provision of services were substandard. The city’s financial situation was obviously in dire straits,” he said. He listed specific departments that faced the biggest challenges: “public works, public safety and health, infrastructure and facilities, planning and development, the parks and rec…were in poor shape.”
Orr also answered a question about the city’s cash flow. “The city was in dire straits also in that respect,” he said. “It had an inability to meet its bills as they became due. Bills as simple as payroll.” There were bounced checks, and it sometimes took 180 days to pay vendors.
Here’s how Kevyn Orr described his current job title in one of his first answers to questions while he’s on the witness stand:
“I’m currently the Emergency Manager for the city of Detroit as recently revised.”
On the witness stand now: Brom Stibitz, director of executive operations at the Michigan Department of Treasury. He’s testifying, so far, about the oversight power the state has through the “grand bargain” legislation. That includes the Financial Review Commission created by the “The Michigan Financial Review Commission Act” and in place for a minimum of 10 years. It becomes operational, according to the Act, the day the Plan of Adjustment is enacted.
The commission is a nine-member panel that oversees Detroit’s fiscal operations including its finances, budgets contracts, collective bargaining agreements, debt issuance and revenue estimates. The commission includes the Detroit mayor, city council president, state treasurer, and director of the department of technology, management, and budget or a designee from any of those people. In addition, the governor has five appointments that will include at least one city resident. One of the five will come from a list provided by the Speaker of the House and one from a list provided by the Senate Majority Leader.
There is a $900,000 appropriation in the Act, which has not yet been spent. The money from last fiscal year, which ended yesterday, will carry forward for the next fiscal year, which begins today.
One position, the executive director, has been created to date, which reports to Chief Deputy Treasurer, Stibitz said. The position has not been filled because state officials wanted the commissioners, when they are appointed, to have a role in hiring the director.
The commission, Stiblitz says, also has to give reviews to the governor reports about the city. They will be posted online.
Here are some of Gilbert’s statements during his testimony:
On the Grand Bargain and why his companies are contributing $5 million to the city’s pension funds:
“If the Grand Bargain is able to help the city get through this bankruptcy faster and get the pensioners more of what they bargained for and saves the art and doesn’t force the art to be sold out of the DIA, I think that’s a triple win for everybody involved,” he said.
On the image of the city as defined by the issue of the Detroit Institute of Arts collection as an asset that could be sold during bankruptcy:
“For the assets of a museum such as that to be stripped and sold in bankruptcy would probably be a blow for the city of Detroit and its image. It’s an overwhelming challenge to change and get positive from everything that’s occurred,” he said. “It would be very, very difficult to get those images and hat concept past almost the public relations side which ultimately affects the economic viability of a lot of things that happen in Detroit … Every day we’re talking to investors from numerous places who come to Detroit, who go on tours, (who are thinking) should they move their offices, businesses, open up an office? Ultimately they all ask about the bankruptcy, and they ask about the DIA: “Are you guys really going to sell off some of that?’”
And more on that:
“An internationally acclaimed institution, such as the DIA, which is probably the single biggest culturally significant attraction in the city of Detroit and is prominent in national and international circles, for the vision or image of that kind of art being stripped and sold in a bankruptcy is an image and vision that I think would be overwhelmingly difficult to overcome, even post-bankruptcy for the effort of trying to get investment into the city and convince others of why Detroit is turned and going in the positive and correct and right direction.”
Let’s catch up with Gilbert’s first bit of testimony. Here’s what he said in answering attorney questions:
* He is chairman of Rock Holdings and Quicken Loans, the second largest mortgage company in the United States. His holdings include 109 individual companies, including two casinos, the Cleveland Cavaliers basketball team and several start-up businesses.
* His companies employ about 12,500 in Detroit, about 80 percent of whom live in the city.
* He has an undergraduate degree from Michigan State University and a law degree from Wayne State University.
* Gilbert, who lives in Franklin, moved his companies downtown because, first, their leases were up in the suburbs and second, he didn’t think the businesses would grow like they should unless they were in the city’s core.
* His company holdings include 60 structures in the city, totaling about 9 million square feet including parking. The cost: about $1.4 billion.
* He has invested in the M-1 rail line, which he expects will be operating in mid to late 2016.
Today’s first witness is billionaire businessman Dan Gilbert who for roughly eight months was the co-chair of the Blight Task Force. He said he was one of the main authors of the 380-page report. Gilbert described the group as focusing on residential blight, vacant lots and commercial properties located near residential neighborhoods.
“It did not include large massive commercial structures such as the Packard Plant or the train station,” Gilbert said.
Gilbert said his involvement in task force began with getting comprehensive information about blight in the city through research and visual inspections. That information was put into a database and connected with 24 other existing databases. “We put all that data together and got a very, very clear picture both from an information side from the databases and from the literal, visual side. We had no guesses any more. We had a very clear understanding of what was there and what was blight,” Gilbert said.
City attorney Greg Shumaker, of Jones Day, asked Gilbert his definition of Blight. “That can be a very vague definition,” he said, “depending on who you are and where you’re coming from.”
“We looked for best practices nationally,” Gilbert said. “We made all kinds of recommendations there.”
Addressing blight is one of the top four concerns for Detroit, Gilbert said, along with jobs, crime, and education. “I don’t believe we can fully address the other three until blight is removed from the city,” Gilbert said. “Blight is like a cancer. Blight grows. In other words, just like a tumor if you take out half the tumor, that’s probably not a great situation, the tumor tends to grow back.”
Blight, Gilbert said, describes homes that are “beyond repair, homes that needed to be taken down, demolished or removed piece by piece,” he said.
The Plan of Adjustment calls for about $440 million to be spent on blight removal in the city over the next decade.
The afternoon court session started with attorneys for Oakland and Wayne County telling Judge Steven Rhodes they would drop their objections to the city’s Plan of Adjustment. Macomb County will not. Here’s why.
Meanwhile, Terri Renshaw is on the witness stand. She’s a former city staff attorney and a member of the Official Retirees Committee in the bankruptcy case.
This morning, researcher Caroline Sallee finished her testimony. As a manager in Ernst & Young’s Quantitative Economics & Statistics practice Sallee was responsible for creating the City’s 10- and 40-year property tax and state revenue sharing projections. Here is her report. She was followed by Fire Commissioner Ed Jenkins and Police Chief James Craig. (See below for their testimony.)
After discussions about the regional water deal, Terri Renshaw took the witness stand. She’s a former city law clerk and a member of the Official Retirees Committee in the bankruptcy case. She’s being questioned by Claude Montgomery, one of the attorneys for the committee.
The first creditor attorney to question Chief Craig is Barbara Patek. Her bio is here. She represents the Detroit Police Officers Association. She asked him about leadership, the union and restructuring the department. Craig said there was not always agreement between the department and the DPOA, but “was always a willingness” to talk.
The second creditor attorney to question Chief Craig was William Arnault. His bio is here. He represents bond insurer Syncora. He started with questions about what factors related to the bankruptcy affected morale within the department and about the department’s ability to recruit new officers.
Detroit Police Chief James Craig has been outspoken about the need to place civilian employees in some of the roles sworn officers are currently holding. For example: “Dispatchers have been sworn police officers,” he said. “In most departments today, dispatch functions are performed by civilian staff.” He also said vehicle maintenance officers would be changed to civilian employees.
And what will happen to the sworn officer currently serving in those positions? Hertzberg asked.
“They’ll be deployed to the field,” Craig said.
Under questioning from city attorney Robert Hertzberg, the Detroit Police Chief said there were many workplace issues causing some officers to leave.
“Pay, benefits … working conditions,” Craig said. “They just felt like with everything the city has faced over recent years, they were concerned about the future of staying.”
Related to working conditions, the department has cameras in some police cars, but Craig said they are dated and need replacing. Radios have sporadic outages. “Certainly that’s a core issue for officer safety,” he said. “It puts them at risk.”
But Craig also identified recent improvements: detectives are posted in all 12 precincts, crime is down by 19 percent.
Shortly after James Craig became Detroit’s police chief in July 2013, he saw what he thought was a beat up taxi cab on the street.
“I found out it was actually a police vehicle that was in service,” he said. “When I took a closer look I found out that the department’s fleet was certainly in need of replacement.”
Craig is on the witness stand, being questioned on direct examination by city attorney Robert Hertzberg. Craig started 37 years ago as a Detroit police officer. He left the department, one of 1,500 officers laid off, and he went to Los Angeles in 1981 where he started as an officer and rose through the ranks. He ultimately retired as a “Captain 3.”
Hertzberg asked him more questions about what it was like when he came to Detroit last year.
“It was very clear that the morale was at the very bottom for rank and file officers. It was also in my judgment that the department lacked leadership and accountability and lastly something that became obvious was the fact that the department had no credibility with the community it served. The local community and surrounding communities,” he said.
Here’s Craig’s bio on the city’s website.
At the end of Jenkins’ testimony, Judge Steven Rhodes had a few questions. Here’s one of the exchanges:
Judge Rhodes: You were asked whether the investments the city foresees for the fire department will permit the department to meet the standards of the National Fire Protection Association, and you said you thought it would come close. In what respect will it not meet those standards?
Jenkins: We can always use more money but in terms of those standards, 49 companies is great. When I came on, we had 82 companies and we were able to respond to multiple large-scale fires. …I believe $158 million will do a great deal to help the fire department but we’re about four years behind in terms of training and equipment. … If we get this money, it’s going to be spent wisely. I can’t say it will be perfect but it will be very close.
Macomb County’s attorney, Debra O’Gorman, who is from New York, also cross examined Ed Jenkins, the city’s fire commissioner. She’s pointing out that any testimony he gives about fire fighters is not based on any systematic study “Just some anecdotal converseations with a few people?” she asked.
“Yes,” Jenkins said.
The first attorney to cross examine the fire commissioner is Stephen Hackney who represents bond insurer Syncora. He’s asked questions about the effect of the bankruptcy on fire fighter morale and discussed the dynamics of any citywide revitalization on the department’s work.
For example, Hackney raised the earlier statistic of how many runs are made to vacant buildings, presuming those runs wouldn’t have to be made after the city’s blight removal efforts.
“A healthy city doesn’t burn,” Jenkins said.
Jenkins said the fire department plans to build seven or eight new “super stations” in locations throughout the city. Older stations would be “shuttered and closed.”
No testimony on what would happen to them…but here’s a photo from a lovely wedding I went to last weekend in a former station on West Lafayette Boulevard. The property has been sold and turned into a charming event space
Fire commissioner Ed Jenkins’ testimony is contradicting, slightly, some previous testimony in the city’s case. For example, restructuring expert Charles Moore testified that fire department response times were 9 minutes while Jenkins said 7 to 8 minutes was the norm. There as also the exchange about the pop cans serving as alerts for faxes for run notification. (See below.)
A few more tidbits from Detroit fire commissioner Ed Jenkins’ testimony:
*The Plan of Adjustment provides for $158 million in improvements for the department.
*About 1,150 people currently work in the department. About 770 are fire fighters, but 1,019 are needed. About 220 are Emergency Medical Services technicians, but 260 are needed.
*The department makes about 30,000 runs annually. About 70 percent are to vacant homes.
*The average age of a fire station is 90-100 years old. Many of of them have had to be shored up to support modern fire fighting equipment.
*At one point, the department only had four ambulances operating for the entire city.
*In an answer to Hertzberg’s question about why vacant buildings burn, Jenkins said, “I know pigeons don’t smoke so I know there are some unscrupulous individuals that purposefully set fire to these buildings.”
*EMS handles up to 110,000 runs a year.
Ed Jenkins is on the witness stand, called by the city’s attorneys. He’s the city’s Executive Fire Commissioners, a post he’s held since April. He’s being questioned by city attorney, Robert Hertzberg, who’s with the Southfield firm Pepper Hamilton. Jenkins’ career also includes work as a Detroit fire fighter and lieutenant. He’s also a Certified Public Accountant and worked at Coopers & Lybrand and Delphi Corp.,
The city’s Plan of Adjustment contemplates some $158 million in upgrades and improvements for the fire department. According to the city’s Chief Financial Officer, John Hill, who testified at the bankruptcy trial last week, about $59 million is to be spent on the department’s fleet, including the replacement of vehicles. The city also would invest $71 million in capital improvements, including the repair and replacement of several fire stations. Another $20 million would go toward equipment.
Under questioning, Jenkins attempted to debunk the pop-can-on-the-fax-machine story, saying it dated back to the 1980s when a device was put on printers as a “convenience” alert in case the person in charge of answering the phone walked away. Last week, one of the city’s witnesses testified that instead of having modern alert systems, fire stations were receiving faxes to notify them of calls and addresses. In order to ensure they would hear the alerts, fire fighters placed pop cans on the fax machines so they would fall off when a fax came in. The noise would alert them to the call.
Here is the Detroit Free Press story about the device.
The first week (ok, four days because of Labor Day) wraps up today in Detroit’s bankruptcy trial, and we’ll be blogging from the courthouse when testimony resumes later this morning (See below). The city’s Chief Financial Officer John Hill will be back on the witness stand where he’ll continue to be cross examined by bond insurer Syncora’s attorney. Syncora, of course, objects to Detroit’s plan to restructure its debts as the Bermuda-based company stands to be paid 10 cents on the dollar for the hundreds of millions of dollars the city owes it.
And here’s a bit of the work from our colleagues who are sharing space in the media room during the trial:
WDIV’s Rod Meloni has been covering the case nearly full time. His latest work is here with links to previous stories. WXYZ’s Jim Kiertzner also regularly files about the bankruptcy. Watch his stories and read his blog here.
Another diligent reporter is Steven Church from Bloomberg. His latest story, which takes more of a national perspective, is here.
We are finished for the day. Charles Moore will return to the witness stand, as his cross examination is not finished.
I’ve got some catching up here from some of what we heard today — I’ll do a separate posting over the weekend about the testimony related to the recoupment of Annuity Savings Fund monies from retirees.
We’ll be back at 8:30 a.m. Monday. The city is expected to call Beth Niblock, who is in charge of information technology for the city.
Earlier today, Charles Moore testified that Detroit fire fighters had balanced pop cans on a fax machine so that when an emergency transmission came in, the sound of the cans falling would alert them.
Many of us in the media room thought that needed to be checked out and verified.
Well, Tresa Baldas from the Detroit Free Press did. Here’s her story.
Detroit is so broke that firefighters get emergency alerts through pop cans, coins, door hinges, pipes and doorbells. And they make these gizmos themselves … In most cities, fire officials say, when an emergency alert comes into a fire station, a series of bells sound off – like Morse code. Then an automated voice offers instructions on which engines go where. “Well, we don’t have that system here,” (Detroit Deputy Fire Commissioner John) Berlin said. “The firefighters modify … they improvise.”
Perhaps we will get some additional information during the cross examination, but Charles Moore just testified that under the Plan of Adjustment, the mayor’s office would add $20 million in additional labor for “lean resources” but save $17.5 million in other budget items.
The City Council budget shrinks, primarily because much of the planning commission functions are moved to another department. There is a planned $200,000 investment in staff training for council employees.
36th District Court would have more of a paperless court system, so much of the $4.2 million in planned technology spending there would go toward that. Other resources are going toward improving the collection rates of tickets, judgments and “anything else the court could collect” from 20 percent to at least 50 percent.
We’re back in session with Charles Moore still on the witness stand. Before the lunch break, he testified that the former Detroit City Airport would see nearly $16 million of upgrades if the current Plan of Adjustment is adopted, according to testimony this morning.
Moore said the improvements are aimed at maintaining the operating certificate at the airport, officially known as the Coleman A. Young International Airport.
“There are a variety of potential uses for the airport,” he said. “The airport under the FAA has to comply with federal guidelines and, in particular, the airport operating certificate is to ensure that there is a level of safety involved.”
Detroit has about 300 parks, but nearly 200 have closed over the last several years.
Mayor Mike Duggan wants them all re-opened, according to testimony today.
That’s why the city’s Plan of Adjustment calls for the parks and rec department to spend $38 million to bring them back online along with a handful of recreation centers around the city.
“This is a very significant initiative for the mayor,” Charles Moore testified. He’s a restructuring expert. “He has indicated this is very important for the livelihoods of the residents in the neighborhoods as part of re-opening those parks. There is a level of investment that is required.
Restructuring consultant Charles Moore just discussed how the city’s Plan of Adjustment addresses the Detroit Department of Transportation. DDOT covered 16 million miles of routes in 2009, he said. That was down to 12 million miles last year.
To cover those roads, Moore said the city currently SHOULD have 230 buses. “Unfortunately, right now, it’s only 190 or so. As a result of that, even though there are routes being driven, when there are not buses available, those riders don’t get picked up,” he said.
Another concern: “The department has numerous safety issues for a variety of reasons,” Moore said. They have been related to: riders assaulting riders, riders assaulting drivers and workers’ compensation claims. Specifically, five drivers have been assaulted. Two of those were stabbed.
Moore testified there are about 30 911s calls made each month by Detroit bus drivers. Cameras on the buses and additional security are planned.
The plan proposes that $100 million is invested in the department and that fares are raised to generate revenue. Currently most fares are $1.50. “This contemplates in a step fashion that by the end of FY 2023 the fare will be $2.50,” Moore said.
Clearing up worker’s compensation claims also should force some cost savings, he testified.
While on the witness stand and questioned by city attorney Robert Hamilton, restructuring expert Charles Moore from the Conway Mackenzie firm walked through some of the public safety improvements and investments provided for in the Plan of Adjustment.
“We turned over every rock in trying to under how the departments are operating now,” Moore said, “and how they might operate better.” That includes analyzing how an increase revenues including procuring grants, including from the federal government, and charging for services including false alarms and other things that cause the departments to make unneeded runs.
As Detroit has 5 times the crime rate when compared to comparable cities, based on FBI statistics, Moore emphasized the importance of improvements in the Detroit Police Department as related to improvements in the quality of life in the city in general. He also addressed what’s proposed for the fire department.
The city’s Plan of Adjustment calls for the following for the Detroit Police Department:
$179 million in additional operating expenses.
$91 million for the “fleet,” in part so that vehicles can be replaced every three to four years
$175 million in technology upgrades including hand-held radios and better integrated communication and computer systems.
$34 million for capital improvements, including new precincts and a new training facility, because the existing one “is in significant disrepair.”
$150 million in cost reductions within the police department. Nearly $88 million of that would come from “labor efficiencies and attrition” in the police department. For example, “Newer officers coming on at the lower end of the pay scale,” Moore testified. It would not be a reduction uniformed officers but in administrative positions.
For the Detroit Fire Department, Moore said the need for improvements is clear: response times were 9 minutes for firefighters and 18 minutes for emergency medical services. The national standard is 6 minutes.
$59 million to be spent on the DFD fleet, which includes replacements of vehicles.
$71 million in capital expenditures that would repair and replace several fire department facilities. Some of the city’s older site don’t accommodate current equipment. Also, “Where firehouses are located is very important,” he said. About $30 million is intended to repair existing facilities. About $20 million would pay for equipment such as boots and coats.
“I know from many discussion with the fire department, this has been a bit of a bittersweet process. Certainly on the one hand, having better equipment, being able to respond and do their job better is a positive, but they also recognize the Chapter 9 process has been difficult on employees,” Moore said. “They recognize it will improve the morale, but they also recognize it has been difficult on employees.”
Restructuring expert Charles Moore is covering blight initiatives, that are provided for in the city’s Plan of Adjustment.
Specifically, he described the comprehensive database done by the Motor City Mapping Project.
And he gave some numbers:
An estimated 80,000 properties are either blighted or showing signs of blight.
It would cost an estimated $850 million to remove all of the blight in the city.
Some $52 million from a U.S. Department of Treasury program that was intended to mitigate the foreclosure crisis will be used to remove blight, as city officials convinced the feds to modify provisions of the program.
Moore also described “blexting,” a mobile app that allows individuals to text in the address of dilapidated structures around the city.
“If they see signs of blight, they can enter it into a database so the city is aware of it and can perhaps take action before it gets too far,” Moore said.
Now on the stand is Charles Moore. He’s a restructuring expert at Conway MacKenzie, a Birmingham, Mich.-based firm that is one of the city’s consultants.
His testimony, based on research and analysis Conway MacKenzie has done since January 2013, largely focuses on projections that show under the Plan of Adjustment, the city would increase revenues by $438 million over the next decade while cutting $358 million in expenses.
He’s being questioned by city attorney Robert Hamilton, who works at Jones Day in the firm’s Columbus, Ohio office.
Meanwhile, here’s the city’s contract with Conway MacKenzie.
Judge Steven Rhodes had questions of his own for Detroit CFO John Hill. Here’s part of their exchange.
Judge: Are you familiar with the city’s plan?
John Hill: Yes I am your honor,
Judge: As the CFO of the city, what would you say are your responsibilities in the city’s implementation of the plan if it is confirmed?
J: I believe that I have a number of different responsibilities in the implementation of the plan. One of the first responsibilities is to take the plan and really translate that into documents and processes that the city can respond to. The plan has utilities built into it, basically three different areas where it is actually uniquely different for the city. One is with people, one is with processes, another is with systems. All three of those things, I believe, are needed to move Detroit to a new future. So my responsibility is to make the plan real by putting in documents and in systems that can be acted upon. And then also to provide information. Accurate, complete, objective information to all of the parties that have an interest in the plan. I view, and I think some of the way that I’m approaching it comes from how I viewed the work that we did in Washington D.C.. Within this plan, there are a number of organizations companies, people who are not being paid what they were owed. No one can argue that question And the plan also allows the city to use some of the funds that would have gone to these other creditors but for the bankruptcy if they were available to invest in systems, processes and people in order to improve the city on a long-term basis and improve outcomes and also to try and put the city in a place where it would be able to pay something eventually to these creditors. It’s kind of the way that I boil it down and I think there is a fundamental responsibility for the city to report exactly what those funds are used for and report exactly what those funds were able to do as a result of being allowed to spend them. That’s how I approach my role. It’s also to make sure that the Mayor and the Council, other decisionmakers in the city have the information that they need in order to make real decisions, not decisions that are made on dated information or information that isn’t complete but decisions that are based on information that has been analyzed and studied and looked at. So the improvement in all of the processes including the creation of the financial planning and analysis group is to create that capacity in the city to use information at much higher levels to make these kinds of business decisions. I’ve also taken on the responsibility that if there’s a hole now that has to be filled at some point in either some of the HR processes or other places in the city, and I don’t have a responsibility for HR but I can’t get done what I need to do without that assistance so I’ve had to create that. So I believe that we can’t let existing structures stop us from moving forward in this plan so my responsibility is to identify all of the impediments associated with implementation of the plan and try and mitigate against those risks. That’s why I say it’s not going to be easy to implement If you go into this thinking it will be, I believe that you will fail.
Judge: That’s a good Segway to my next question which is what challenges do you foresee that you will have in carrying out your responsibilities if this plan is confirmed?
JH: I think the biggest challenge is racing against time. In the District we found that once there was a perception that the crisis was over, it was very difficult to get movement, and so we have to move very, very quickly to put the infrastructure in place and try to make sure that that crisis mentality in trying to get change done continues. The other issue is that this plan calls for a level of cooperation among a lot of different organizations within the government, particularly IT operation. Before Beth Niblock came, I had some concerns about me be in charge of IT as I have told you. … I am not an IT director. She’s one of the best. So it’s getting the resources at the leadership levels in government that can really make the difference … Do you know the mayor actually drove down to Louisville to meet with Beth in the evening and convince her to come here? That kind of dedication to go after the right people in the right places is exactly what I think we need. The work that’s been done by the Emergency Manager so far to help us with grants management in setting up that office of the CFO and all of the support we’ve gotten from the contractor and the people in the city has really given us a head start of what’s in the plan. That also gives me a lot more assurance that we can do this. So it’s the capacity to handle all of this at the same time which we’re working through, and to be able to attract the people and the resources that we will need … to lead this effort ultimately.
Judge: What advice do you have for the Financial Control Board?
JH: One thing that’s already built into the legislation is a close working relationship with the CFO. I think working with the city, the Mayor and the Council to establish at the very start, the type of reporting that is to occur on a regular basis. I would also tell them, don’t hesitate to act. I believe they will be able to keep up with the Financial Review Commission, but I also believe that the pressure will help to keep things on track, and it will be their responsibility to help make sure things are on track.
The other think the Control Board (in Washington DC) did that I think was very helpful to the city and it’s kind of the relationship I have now with the Financial Advisory Board that’s in place, there are leaders that have expertise that I rely on now in order to help with some of the decisions that need to be made. They’re experts in finance, experts in IT, experts in HR. … I met with them, talked with them picked their brains and asked questions. I think being a part of providing that expertise to the city is a major part of the work they would do.
Professional exercise rather than a political exercise, I also weigh more heavily. I understand the importance of politics in helping to solve these issues, but these are tough issues that require people who have deep skills and so the more of those individuals you can have on the board versus the political people, I think the better.
Syncora completed its cross examination of Detroit Chief Financial Officer John Hill. Debra O’Gorman, representing Macomb County, had a few questions, mainly confirming that Hill had limited insights about the Detroit Water and Sewerage Department. (See opening statements for a brief discussion of how that relates to the city’s bankruptcy case…)
On re-direct, city attorney Geoffrey Stewart asked a few questions to counter Syncora’s assertions that Detroit could raise taxes to generate more revenue (presumably to pay creditors what’s owed them instead of erasing debt through the bankruptcy). Stewart also clarified what differences exist between Detroit and Washington D.C. , where Hill was involved in financial restructuring.
In doing so, Hill mentioned the political dimensions of Detroit’s bankruptcy. His statement (below) has interesting (insulting?) implications for the city’s elected officials.
Here are parts of what Hill said:
In Washington D.C. “Congress acted quickly … The deficits never went as deeply as the deficits went here. Also, the Congress has exclusive jurisdictions over Washington D.C. The citizens of Washington don’t have a vote in the Congress of the United States, so the ability to act without political repercussions from people who elect you was also a factor that helped the Congress move very, very quickly.”
And about the possible effects of raising taxes?
“In some cases increasing tax rates actually lowers taxes. It’s getting into what’s commonly known as a death spiral. And Detroit, which is a highly taxed jurisdictions and also one that is obviously suffering from a long-term economic crisis, I would not at all think that raising the tax rates at this time would be an appropriate strategy here. In the District, although the top tax brackets were raised, there was also relief at the lower end and now the district is looking to lower taxes across the board. And remember, it’s a state and a city so it has state taxes. It has property taxes. It has income taxes. It has any taxes you would have in another jurisdiction. They also lowered the sales tax as well, and so I think it would be very difficult to imagine a scenario where this city would benefit from raising taxes.”
See below for updates throughout the day. WDET’s Sandra Svoboda is in the federal courthouse following the proceedings. She’s also on Twitter @WDETSandra.
Opening statements are stretching into a third day in Detroit’s bankruptcy trial, technically a confirmation hearing on the city’s Plan of Adjustment — the “blueprint” for how to restructure debt and reinvest in city services. Bankruptcy Judge Steven Rhodes is presiding over the hearing and will eventually confirm or reject the Plan.
Most of the attorneys who have chosen to make opening statements have taken longer than they predicted to introduce the reasons they support or object to the bankruptcy restructuring plan. As the trial continues — it’s scheduled into October — the city, its supporters and creditors will put witnesses on the stand to help the judge decide if the plan is feasible, reasonable and not unfairly discriminatory to creditors. Those are standards used in bankruptcy law to decide if the plan to shed debt is adopted.
Syncora attorney Douglas Smith continues to cross examine Detroit’s Chief Financial Officer John Hill, mainly by suggesting measures Detroit could take to increase revenues. A few of Smith’s latest ideas: implementing taxes on vacant and blighted properties. (This is done in Washington D.C. where Hill lives.)
Hill tried to address the feasibility of such proposals. “You have to look at collectability,” Hill countered.
Bond insurer Syncora stands to lose hundreds of millions of dollars in the bankruptcy restructuring. The city’s current Plan of Adjustment proposes paying the Bermuda-based company about 10 cents on the dollar.
Through his questioning of Hill this afternoon, Smith is making a case to Judge Steven Rhodes that the city could 1) do more to increase its revenues 2) reduce its expenses 3) adjust its financial projections that would, on paper, show more available cash in the restructuring that could be paid to financial creditors such as Syncora.
With testimony this afternoon largely focused on detailed financial charts on display in the courtroom, there have been some tedious discussions. City attorney Geoffrey Stewart wrapped up his questioning of Detroit Chief Financial Officer John Hill after about three hours, and now Syncora attorney Douglas Smith is cross examining him.
Smith’s questions have so far focused on brightening the city’s financial picture. He’s asking about what revenue isn’t collected and when it might be. For example, “tens of millions” of dollars go unpaid on properties, Hill admitted under questioning. Grants could be better managed — funds have gone unspent and had to be returned in the past.
Smith also turned to the question of how the city might better collect income taxes and asked about what initiatives are coming to ensure payments from “reverse commuters”: Detroit residents who work outside of the city and do not pay the income tax they owe.
Hill says there is a plan in the works for “piggybacking” of the city’s income taxes with the state’s collection of its income taxes. An agreement is being discussed, he said, and it would increase collection rates. City residents pay 2.4 percent in income tax.
The initiative could start in 2016 for collection of the 2015 tax year. “It has to be phased in because of the withholdings,” Hill said.
Attorney Smith raised this issue with the trial’s first witness, Robert Cline, a financial advisory who appeared Aug. 18 because he took a new job in Europe and was available after that day. Incidentally, a Citizens Research Council of Michigan report cites a study that found $142.3 million of individual and corporate income taxes go uncollected by the city..
Court is on lunch break. Here’s the last thing city CFO John Hill said on the witness stand: Of the $1.7 billion the city intends to put toward restructuring and service improvement, about $200 million will come from the loans. The rest will come from surpluses from the plan and from initiatives that decrease expenditures and increase revenues.
Attorney question: How important are the restructuring initiatives to the success of Plan of Adjustment as the city exits bankruptcy?
Detroit Chief Financial Officer John Hill: “I think they’re very important. What is also very important is improvement in the financial management systems which is one of the restructuring initiatives. Without that improvement, it would be very difficult for the city to get the kind of information it needs to operate. … I could not imagine some of these initiatives not being done and the city either improving its operations or its access to information or its ability to control its resources.”
Attorney: Is there a master schedule anywhere for the restructuring initiatives?
Hill: “We have a schedule that actually shows the restructuring initiatives that have been applied for funding.”
Attorney: Who will ensure the initiatives are completed?
“I believe the CFO, I’ve taken responsibility for that. I believe ultimately it’s a joint responsibility between the CFO and the mayor because these are restructuring initiatives that need to have operational oversight as well.”
Here are some excerpts from the testimony of Detroit Chief Financial Officer John Hill. (More below!)
On the Plan of Adjustment:
“We definitely believe that the plan gives us a road map to how we should be operating.”
On if the city could change provisions of the Plan of Adjustment:
“There has to be approval for deviation from the plan by the Financial Review Commission, and so the plan really becomes a road map for how we would operate going forward.”
On improvements being made to accountability within city government:
“There have been issues in the past where people started contracts without approval but those holes are being plugged.”
Detroit CFO John Hill’s testimony covered his relationship with the mayor, likely an effort by the city attorney to show that reforms in the Plan of Adjustment that are already underway would be supported by the city administration after the bankruptcy case is complete and Emergency Manager Kevyn Orr’s term ends.
Hill has a direct-line reporting relationship with Orr and a dotted-line relationship with Mayor Mike Duggan, he testified.
“But that’s not really the way we’ve operated,” Hill said. “The dotted line means the mayor has an interest in the work I’m doing but is not able to direct that work. … I’m in at least three meetings a week with the mayor, I have a one-on-one meeting with the mayor. All of the plans I want to implement I have detailed discussions with the mayor on those plans. The mayor is a part of the review process for determining the quality-o-life projects that move forward so we coordinate with the mayor on that. It’s pretty much the normal relationship you’d expect with the executive of a city.”
Hill says he would “be upset” to leave some of the projects he’s started because he wants to see them through. And that could take a couple years.
City attorney Geoffrey Stewart asked Hill if he’s had conversations with the mayor about staying on past the current contract time. Hill said the mayor asks him if he’s “bought a house yet.”
“I’m more of a downtown condo guy,” he said.
An attorney for the city is questioning Hill about how financial operations are being restructured (read: improved.)
Hill described how property tax assessment capabilities are being improved with the help of helicopter- and street-level data collection.
“We will have data verified for every property in the city,” he said. “We are right now going through the verification of that entire database.”
Grants are being better managed, and new systems are being purchased, Hill testified.
“We’re in the middle of a fast-track process to acquire a new financial management system,” Hill said, adding the city has two that it has two cloud-based system it is choosing from. “We are currently evaluating both systems with the help of a consultant and we believe we’ll have a selection by the end of September.
The new system, he said, will allow better accounting, reporting, monitoring and reporting. Hill said the city did not close the books monthly and evaluating the yearly reports was challenging.
“The annual statement took us a very, very long time to prepare and have audited,” Hill said. “We put a team in place to make sure the audit became a priority. The Emergency Manager and I wanted to make sure that we got the 2013 audit done, and it was, and we also have a team now that’s working on monthly closes for our financial statements. We’ve begun identifying all of the issues with those monthly closes and we’re working on those now.”
The first witness is on the stand, city Chief Financial Officer John Hill. He’s being questioned first by city attorney Geoffrey Stewart, of the Jones Day firm. Here’s Hill’s expert report related to the Detroit bankruptcy case.
Hill was the executive director, the top staff member, of the Washington D.C. Control Board that worked to restructure that city’s financial and operational management systems. While there, he also worked with department heads to improve efficiency and with the mayor and city council to get them to support “necessary changes” including reductions in staff. There also were efforts to forecast revenues and expenditures. He also worked at Andersen where he was the partner in charge of state and local government-related work and now operates his own consulting company.
At the invitation of Emergency Manager Kevyn Orr, Hill has been CFO in Detroit since November where he’s helped establish that office and “managed the consensus budget process” that is being put in place.
He’s also working on grants management. Here is Orr’s order that established a Grants Management Department.
Hill has a contract through September, though he expects that will be extended until a new CFO is appointed, per the new state law requiring such a position in the city. That measure was a condition of the city pensions receiving $195 million in state money as part of the “grand bargain.”
AFSCME Council 25 is represented by Richard Mack, who concerns are similar to the UAW attorney. AFSCME represents employees whose pension and health care benefits are PAID for by a separate entity — the state, for example. But since those benefits are administered by the city, they are proposed for cuts in the Plan of Adjustment.
“They’re impairing benefits that have already been paid for,” Mack said. “I think that’s an important point.”
State law, Mack said, prevents the city from cutting contractual obligations. “We would simply ask that the plan not be confirmed unless those provisions are removed,” he said.
UAW attorney Peter DeChiara objects to the plan because of cuts it makes to library employees’ and retirees’ pensions and health care benefits as well as its requirement for the recoupment of annuity savings funds.
“The library is not a debtor in this case and the library’s obligation are not debts of the debtor that are subject to adjustment by this court,” he said. “(The library) engages independent of the city in collective bargaining with units that represent its employees, including the UAW. …It is the library not the city that pays out of its own fund the pension contributions for employees and retirees” and has done so since 1938.
“It continues to make those contributions today,” he said. The benefits are administered by the city.
They repeated some of Quadrozzi’s arguments related to DWSD, mainly the $428 million that the city intends to move out of the DWSD budget and partially into the citywide pension funding.
“If we take money out of DWSD at this point, we are going to render it vulnerable to capital breakdown,” Newman said, adding he agreed that $4.5 billion should be a target for the amount of structural improvements to the system.
Representing Oakland County, attorney Jaye Quadrozzi objected to the portions of the city’s Plan of Adjustment that involve the Detroit Water and Sewerage Department. She was critical of the city’s plan, in part, because of the financial projections it uses to calculate DWSD-related budget forecasts. She said the city’ plan would cause “untenable deficits and shortfalls” to DWSD budgets.
She questioned the city’s plan to replace just 1.5 miles of the system each year, pointing out it would take 561 years to complete such a project. And what happened 561 years ago? “It was the end of the Middle Ages,” she told the judge. “DWSD clearly needs more than that.” Quadrozzi said Oakland County would like to see 8.5 miles replaced annually and she called for a $4.5 billion investment in the system for the work.
The judge halted her statement.
Judge: You can’t come to court and say the city needs to spend $4.5 billion on capital improvements without an answer to the question of where the money is going to come from.
Quadrozzi: I believe the answer to that question lies in a number of legs of a DWSD table.
She went on to say one leg is “keeping DWSD money inside DWSD.” Another leg is internal reforms to operations. “We would suggest that’s undergoing slower than Oakland County would want and I think slower than DWSD itself would want. … There is an effort to optimize within the organization.” The third leg, according to Quadrozzi, is “rightsizing.” She said, “DWSD has a huge service area, thousands of miles” and called for “an analysis for what can be done to shrink the system to provide the essential service that needs to be provided.” She described the fourth leg as raising rates.
Judge Rhodes asked Quadrozzi several questions during her introductory argument, telling her “I raise these questions not because I have any preconceived notions about the answers, but now is the time to solve these problems. It’s not enough to just say we have problems.”
Judge Steven Rhodes opens today’s proceedings. Jaye Quardrozzi, an attorney for Oakland County, has about 15 minutes left in her opening statements. She’s objecting to the plan because of the provisions related to pension funding and the Detroit Water and Sewerage Department. Oakland County has 62 municipalities that are part of the city system.
Also expected this morning making opening statements objecting the plan are attorneys representing Macomb and Wayne counties, the UAW, which represents library employees, and AFSCME Council 25.
The country’s biggest municipal bankruptcy trial enters its second day with opening statements continuing where they left off yesterday.
5:09 p.m. Court is wrapped up for the day. Jaye Quadrozzi, attorney for Oakland County, will re-appear tomorrow morning as she did not finish her opening statement. One of her topics was an objection to the 6.75 percent presumed rate of return on pension investments the city has included in its plan. Here’s part of her exchange with the judge:
Judge: It appears that accepted actuarial science and practice, if that’s what Gabriel Roeder (Smith & Company) and the plan followed, created a very large, somewhere between $1.5 billion and $3.5 billion UAAL (unfunded actuarial accrued liability). Yes?
Jaye Quadrozzi: I believe so…
Judge: Whatever the UAAL is, it occurred when this actuarial science that you are relying upon was used?
JQ: That is correct
Judge: Well, I hate to invoke my mother, but she used to say that just because everyone does it, doesn’t make it right.
JQ: I’m all for mothers. However, the fact of the mater is, not that there is UAAL but that the city has proposed an UAAL that is overstated and nearly everyone you hear will testify to that.
Judge: Using actuarial science that got us into the hole we’re in now.
JQ: They’re not using actuarial science.
Judge: What I’m asking is the experts you’re relying on to say that this rate of return, this .75 percent, is to low, are actuaries whose science got us into the hole we’re in in the first place.
JQ: I would agree with you, but I think simply because an event or group of events happened that caused the UAAL to exist, that you don’t look t sound methods or practices to get out of that difficulty and the city did not do that, your Honor. I think in large measure because they have created a UAAL that is based upon incorrect assumptions, that hey put themselves in a position to propose a plan that does something that is prohibited by law. For that reason, Oakland County objects to that portion of the city’s plan.
Judge: I guess the broader question I have is: if you have an investment enterprise, whether it is a pension plan or whatever it is, that has fiduciary obligations and is obligated to invest as a prudent person would invest, right, would that kind of investor on a long-range basis, which is I guess what we have to look at, be able or reasonably expect to achieve a 6.75 percent rate of return?
JQ: Yes and more than that. We will present expert and fact witnesses that will testify to just that.
4:26 p.m. Now up is Oakland County’s attorney, Jaye Quadrozzi. She says she’ll focus on the structure and legality of pension contributions from the Detroit Water and Sewerage Department that are part of the city’s restructuring plan.
“DWSD is critical to the regional economy and quality of life in this area,” she said. “It’s one of the largest water and sewerage departments in the nation. … You can see why Oakland County is concerned.”
The County is “party to contracts through which DWSD provides water and sewer” services to 62 townships and villages in Oakland County.
“We understand that this is not a trial about DWSD or how to fix DWSD but the city’s plan imposes burdens that will have a significant impact on DWSD and DWSD is already in trouble and they have been for decades,” Quadrozzi said. “So to examine the effect that the city’s pla has and will have is important as to whether that plan can be confirmed.”
She objects to making suburban residents pay for Detroit’s obligations. “If the plan were to be confirmed it would force non Detroit residents … to fund the city’s retirement obligations,” she said.
4:24 p.m. First opening statements by telephone. Kristin Going, representing Wilmington Trust, a COPs contract administrator, is on the line. She only took two minutes.
4:05 p.m. Another attorney, another PowerPoint. Now Jonathan Wagner is arguing against the city’s Plan of Adjustment. He’s an attorney for the holders of the Certificates of Participation, the notes used in the 2005 deal to inject $1.5 billion into the city’s pension funds.
TITLE: The Plan Unfairly Discriminate Against the COPs Class.
On face of the plan, Pension Classes recover 59-60 %
On face of the plan, COPs class recover 0 to 10 %
City acknowledges that discrimination in excess of 50 percent is grossly disparate.
Level of discrimination is actually far greater.
3:55 p.m. Bond insurer FGIC’s attorney Alfredo Perez continues to make the case that some creditors in Detroit’s bankruptcy are getting unfair, undeserved treatment under the proposed debt restructuring plan.
FGIC insured the famed “COPs” deal, the certificates of participation issued in 2005 to fund pension debt.
“They’ve got a billion five of our cash, and we’re the bad guys. How could that be?” Perez said.
3:54 p.m. As the FGIC attorney continues to make his case to sell pieces of the collection at the Detroit Institute of Arts, Judge Rhodes interrupted him and asked, “What about libraries, would you sell them too?”
“I wouldn’t sell the libraries,” Perez said.
“They are, what, more valuable, more significant than art?” the judge asked.
“I don’t know what intrinsic value…”Perez started to answer.
“What is if it had really valuable books in it?” Rhodes asked.
“Then perhaps,” Perez said.
3:40 p.m. FGIC’s attorney is using a PowerPoint presentation to guide arguments. Here’s what the first slide says:
TITLE: Reasonableness of the DIA Settlement – Four Factors
1) What is the debtor’s probability of success in litigating the issues to be settled?
2) What difficulties, if any, would the debtor have in collecting any amounts that would be owed in the event of a successful litigation?
3) How complex are the issues being settled, and what expense, inconvenience and delay would necessarily result from litigating them, instead of settling?
4) Is the proposed settlement in the paramount interest of creditor, giving deference to the view of those creditors that would be adversely impacted by the settlement?
FGIC’s CEO, Timothy Travers authored this op-ed piece in the Detroit Free Press today, titled “Why we creditors are fighting Detroit’s bankruptcy plan.”
3:06 p.m. At the conclusion of his prepared statement, Syncora attorney Marc Kieselstein was questioned by Judge Rhodes who demanded to know what offer the bond insurer would accept from the city as a settlement on what it’s owed.
“Something that’s within shouting distance of what the retirees are getting,” Kieselstein said at first.
“I want a percentage and I want it now,” Judge Rhodes said.
After more exchanges, including Kieselstein first saying he would have to consult with his client, he finally said,” 75 cents.”
And Judge Rhodes asked him where that money would come from.
“Through a combination of all the initiatives I’ve talked about,” Kieselstein said.
“There’s the art,” Kieselstein continued. “You could sell one or two pieces. You could finance a few pieces and you could get us to that number pretty quickly.”
He also mentioned some kind of sharing in the revenue that could occur through revitalization of the city.
2:59 p.m. Syncora attorney calls the statement “the city can’t be forced to sell the art” a “red herring” in the case.
Marc Kieselstein has been making opening statements for more than two hours. He has challenged repeatedly how the city prepared its bankruptcy claim, including what work was done to determine the value of the collection at the Detroit Institute of Arts and spread such funds to creditors like bond insurer Syncora, to whom the city owes hundreds of millions of dollars.
2:50 p.m. Here is the text of a slide the Syncora attorney is using in his opening arguments in the bankruptcy trial to criticize the city’s Plan of Adjustment.
TITLE: PLAN IS NOT FAIR AND EQUITABLE
SUBTITLE: Plan fails to live up to “all that the creditors could reasonably expect under the circumstances.”
SLIDE TEXT Debtor has:
Failed to explore potential benefits to new tax policy;
Failed to explore monetizing art collection (or portion of art collection) before Grand Bargain;
Failed to explore monetizing art collection (or portion of art collection) after Grand Bargain;
Failed even to try to challenge alleged legal impediments to realizing art value.
2:30 p.m. Syncora’s attorney also showed video of conflicting deposition testimony as to whether the city, in preparing its Plan of Adjustment, did any analysis of what would happen if taxes were raised. One consultant said yes, Robert Cline did such an analysis. But Cline said no, he didn’t.
“We have asked ourselves a thousand times in recent weeks why the debtor left such a gaping hole in its confirmation case,” Kieselstein said, adding the city had the “mindset of using every short cut” and the city would have to “throw itself on the mercy of the court” during the confirmation hearing.
(Cline, incidentally, was the trial’s first witness. He appeared Aug. 18. Here is a summary of his testimony.)
2:20 p.m. In his arguments that the city did not meet its obligation to do a “best interest” test of the settlement’s effect on creditors, Syncora’s attorney wondered about the city’s lack of analysis of what would happen if the bankruptcy was dismissed.
As part of his argument, Kieselstein first played video from Emergency Manager Kevyn Orr’s deposition in which Orr described a dismissal analysis done by one of the city’s consultants, Kenneth Buckfire, of the Miller Buckfire firm. Then Kieselstein played Buckfire’s deposition during which he said he never did such an analysis.
“The debtor has no idea what would happen in dismissal,” Kieselstein said, adding the city’s attorneys “cannot do a stand-up analysis of the dismissal scenario from the podium. …
“The debtor has dropped a big mess on your doorstep.”
1:50 p.m. And we’re back!
The schedule for the afternoon, as we know it, is for Syncora attorney Marc Kieselstein to finish his opening remarks. He’ll be followed by Alfredo Perez for bond insurer Financial Guaranty Insurance Company. Then UAW attorney Peter DeChiara and Richard Mack for AFSCME Council 25 are scheduled.
Attorneys for Macomb, Oakland and Wayne counties – not necessarily in that order – will follow.
Will that take us to the 5 p.m. quit time or will we get a witness today?
12:37 p.m. We’re on lunch break until 1:50 p.m. but here’s some catching up I needed to do from the Detroit Institute of Arts’ attorney’s statement: Arthur O’Reilly previewed some of the arguments witnesses will make later in the trial relevant to the grand bargain and the protection of the museum’s collection from sale to pay creditors.
He described the museum’s relevance and importance to southeast Michigan – not just the city’s balance sheet – and said it has innovative programming to reach a large audience. O’Reilly also said, in his opinion, it is “one of the most accessible museums in the world.”
“Despite population decline (in the city), the museum in recent years has attracted as many as 600,000 visitors a year,” he said. “Any sale of the collection would actually put the museum in jeopardy.”
A few of O’Reilly’s points:
The “great preponderance” of art was donated to the museum, not the city, and were made with restrictions on their use. “It’s held in trust and the public is the beneficiary,” he said. “This museum deserves to stay right where it is.”
While the museum’s history dates back to the 19th century and the bulk of its collection was acquired through donations and purchases in the 20th century, the DIA’s importance in the 21st century endures. “The museum isn’t the glittering link to the history of the city” as creditors called it in some filings, O’Reilly said. “But it’s key to our present and our future.”
Selling the art would “chill philanthropic giving in a city that needs charitable giving more than ever.” O’Reilly referred to the judge’s bus tour that city attorneys arranged. (More about that here) “You went through various parts of town. Some were blight. Some were in various forms of decay,” he said. But the tour also included the DIA and visits to some of the galleries. And although Rhodes entered the museum from a back door, O’Reilly said he hoped the judge saw the motto etched above the museum’s Woodward Avenue entrance: “Dedicated to the people of Detroit for the knowledge and enjoyment of art”
“What would it mean if that statement of promise and ambition and hope were rendered a dead letter?” he (somewhat) rhetorically asked the judge. “What would charity mean if the creditors have their way?”
12:15 p.m. The Syncora attorney, Marc Kieselstein, continues to argue that the city has failed to justify its ‘unfair discrimination” in paying different creditor groups different amounts relative to what they were owed. (Syncora stands to lose hundreds of millions of dollars in the bankruptcy restructuring plan, which calls for paying pennies on the dollar for what the bond insurer is owed.)
The slide looks like this:
TITLE: Discrimination is Not Supported by a Reasonable Basis
SUBTITLE: Debtor’s Reply justified discrimination based on:
1: Employee morale
2: Settlement of eligibility litigation;
3: Pensioners’ inadequate ability to protect themselves;
4: The Grand Bargain proceeds are outside the Plan and shouldn’t be counted for discrimination purposes;
5: And discrimination is minimal when OPEB (health care) and pension claim recoveries are viewed in the aggregate.
Kieselstein said all of the above justifications for the discrimination fail to meet legal standards established in bankruptcy cases.
11:49 a.m. Syncora attorney Marc Kieselstein in his opening arguments reviewed what Emergency Manager Kevyn Orr said during his deposition about how decisions were made about what amounts to pay different creditor classes.
(He’s building a case that pensioners were treated much better than financial creditors and that such treatment is contrary to bankruptcy law.)
At his July deposition, Orr was questioned by another Syncora attorney, Stephen Hackney, about what rationale could exist for the discrimination against certain creditors of the city. Orr said they were: the human dimension, the city’s covenant with retirees, the potential invalidity of COPs, and assets in retirement systems.
“We all appreciate the human dimension, your Honor, but let’s remember the rule of law,” Kieselstein told Judge Rhodes. “The debtors’ decision to rely on the human dimension … is a legal nonstarter. That affects the whole legal discrimination analysis, it’s enough to sink the ship. It doesn’t matter what else the debtor says.”
In other words: while the human dimension may be a sympathetic argument, it has no place in bankruptcy and doesn’t exist in bankruptcy law, Kieselstein argued.
“Bankruptcy is the land of broken promises,” he said.
11:35 a.m. Syncora attorney Marc Kieselstein, who is from the Kirkland & Ellis firm in Chicago, told Judge Rhodes he is being “asked by faith alone to find that the debtor has met its many burdens” and urged him to look more closely at bankruptcy law in deciding whether to confirm the city’s Plan of Adjustment.
“This plan unfairly discriminates, fails the best interests tests and is not fair and equitable,” Kieselstein said.
Kieselstein took aim squarely at the “grand bargain,” specifically how it has potentially resulted in money for a single creditor class – the pensioners — and took the “asset” of the Detroit Institute of Arts collection of the bargaining table “for a relative song.”
Kieselstein said the city was enjoying the benefits of bankruptcy – automatic stays of payments, a “fresh start” – without adhering to certain principles of Chapter 9 filings.
“The plan provides vastly disparate treatment for creditors,” Kieselstein said. “It cannot be confirmed without doing serious harm to the rule of law.”
11:13 a.m. That concludes opening statements from the city and its supporters (at least for the purposes of the confirmation of the Plan of Adjutsmen): the Detroit Institute of Arts and the Official Committee of Retirees. Now we will have several attorneys representing creditors who oppose the city’s plan.
First up: Marc Kieselstein who represents bond insurer Syncora, a staunch opponent to the city’s plan. He starts by saying it has “epic levels of discrimination” and says “discovery has revealed the the debtor in many instance gave itself a hall pass from even having to develop basic evidence.”
11:06 a.m. Attorney Sam Alberts, of the Denton’s firm, represents the Official Committee of Retirees. (There’s a provision in bankruptcy law that provides for this committee that exists to protect the interests of all retirees. The committee has representatives from the various pensioner, employee and retiree groups.)
Alberts opened his statement with a review of the importance of the city’s workforce, saying many of them had bypassed higher wages in the private sector for the promise of the public sector benefits including pensions and health care. In some cases, he said, they literally sacrificed “life and limb.”
Alberts reviewed a few of the provisions in the Plan of Adjustment and how they affect pensioners. These include a 4.5 percent reduction to the general service retirees along with a loss of cost-of-living increases. Alberts said the cuts to those increases will save the city $700 million.
In addition, he said, “Thousands of these general service workers will have their pensions reduced further to cover alleged interest overpayments … to annuity savings funds. I say alleged because … these payment were determined without any of their input and were made with respect to contracts and city ordinance.”
Here’s some background on the “annuity clawback” that also will be addressed by individual pensioners Judge Rhodes will allow to testify during the trial.
Under the proposed Voluntary Employee Benefits Association, a replacement to city-funded health care, pensioners will assume a far greater share of their own medical insurance and direct costs. “As you get older, it’s a much more challenging request,” Albert said. “These retirees are more than just pensioners. They received a promise of valuable health care benefits going forward.”
10:45 a.m. Now up: Sam Alberts, who represents the Official Committee of Retirees.
(You can listen to Sam Alberts on WDET here.)
10:26 a.m. DIA attorney Arthur O’Reilly says his opening statement will focus on “respecting charitable donations and respecting the people’s right to arts and culture.”
10:20 a.m. First up to support the city in urging Judge Steven Rhodes to confirm the city’s Plan of Adjustment is Arthur O’Reilly, who represents the Detroit Institute of Arts. Some of the city’s creditors have had an intense focus on the value of the museum’s collection and advocated that it be sold to pay debts to ALL creditors, not just used as leverage to raise money for pensions, as the “Grand Bargain” did.
10:12 a.m. City attorney Bruce Bennett, of the Jones Day firm, concluded his three-hour opening statement. Throughout his time at the podium, Bennett asserted that the Plan of Adjustment was proposed in good faith, that the plan meets the “best interest of creditors” test under bankruptcy law, and that the plan discrimination against different classes of creditors is not unfair.
“We couldn’t do any better for the creditors. The numbers show that,” he told Judge Steven Rhodes.
As for the testimony that will come about the feasibility of the plan’s success, Bennett called it “an intensely and unavoidable factual determination.”
“There is not much law that is going to frame that discussion,” Bennett said. He described some of the conclusions the city’s expert witnesses will make about the feasibility of the Plan of Adjustment:
“The projections are sound. They were prepared by a team.” (Bennett showed a chart with witnesses on two sides: revenues and expenditures. The city’s CFO Jon Hill and Ernst & Young expert Gaurav Malhotra are at the top.)
“There’s also the reality that in the future, things will happen that we haven’t planned for. Unexpected things will most certainly happen, and other people, not necessarily the emergency manager and not necessarily the team that put this together are going to have to adjust to the future over time. We expect those adjustments. We expect those changes. They are impossible to predict and nail down,” Bennett said. “It is therefore important to remember while hearing the testimony that the focus is whether it’s more likely than not, more than a reasonable but a probable chance that everything that’s been put in place under the plan will achieve its intended result.”
Bennett says the city’s witnesses will say, “We think this is the city’s last best chance and that it’s going to work.”
In concluding his nearly three-hour statement, Bennett told the judge “Detroit has a better future after Chapter 9 … Detroit has earned this Court’s help in escaping from its current distressed state. … The Plan will succeed.”
9:25 a.m. City attorney Bruce Bennett is going through a chart titled “Pension Recovery Using Legally-Cognizable (sic) Standards” to show the judge, in part, a “lack of discrimination” in calculating the returns on pension investments. Feels like half the media covering trial have used the phrase “deep in the weeds” to describe the last half hour of courtroom “action.”
9:07 a.m. Some of Detroit’s best journalist are covering this trial. Follow them live at these blogs and Twitter feeds:
The Detroit Free Press live blog, where you can give a letter grade to the city’s opening statements.
Freep Reporters tweet at @MattHelms and @NathanBomey on Twitter
Detroit News Reporters tweet at @RobertSnell_DN and @ChristineFerretti_DN
WDIV’s Rod Meloni is blogging here.
8:55 a.m. Early in his statement today, city attorney Bruce Bennett referred back to the months immediately after the Chapter 9 case was filed and he described conversations with opposing counsel.
“For several months whenever I spoke to a creditor, that creditor said, ‘Detroit is in a very unfortunate, difficult economic situation but we should be paid 100 cents (on the dollar) and here are all the reasons we should be paid 100 cents,’” Bennett said. “Your Honor saw that played out in the courtroom.”
He summarized some of those legal maneuvers and arguments:
Retirees argued the Michigan Constitution protected pensions.
UTGO holders “said among other things that … we have a lien on certain revenues collected by the city.”
LTGO noteholders argued “they had a superior position.”
Bennett also challenged the notion that the case should be dismissed and sent to the state courts. He summarized the potential scenarios, relating back to the early disputes and assertions from creditors:
“There is no reason why all of that wouldn’t happen again. There is every reason to expect that all of that would happen again in state courts but with a very important difference: state court judges would not have the supremacy clause and ordering principles that happen under the U.S. Bankruptcy Code, in particular, that deal with all of the conflicts ad all of the priorities that are being asserted. Instead, you would have stat courts having to give credit to all of these laws, there being no federal law, reason not to, and then having to reconcile all of them.
“Whether there is a race to the courthouse, or courthouses, or a mob scene at the courthouse, there is not going to be a single line where everybody agrees what their rights are and settled for some treatment that arises out of a pro rata assessment where everyone expects it will be fully paid and the allocation scheme from which it occurs are not quite clear under the law. .. It’s a further demonstration that dismissal scenario is not good for creditors generally.”
8:30 a.m. Jones Day attorney Bruce Bennett is back at the podium for the city of Detroit.
He’s continuing his introductory statements in favor of the city’s Plan of Adjustment. Two other attorneys also plan to make opening statements in support of the restructuring plan: Arthur O’Reilly, who represents the Detroit Institute of Arts, and Sam Alberts, who represents the Official Committee of Retirees.
(You can listen to Sam Alberts on WDET here.)
Several creditor attorneys say they will counter the city and its supporters with opening statements objecting to the plan as it now stands. They’re expected to present some arguments about why Judge Steven Rhodes should not approve the Plan. They include lawyers for bond insurers Syncora and FGIC, as well as counsel for the UAW, AFSCME and Macomb, Oakland and Wayne counties.
The country’s largest municipal bankruptcy trial begins today in Detroit. WDET’s Sandra Svoboda is in the courthouse and will update this blog throughout the day…and continue doing so throughout the trial.
Here, she and WDET’s Pat Batcheller discuss what to expect during the trial, which is technically a “confirmation hearing” on the city’s Plan of Adjustment. Ultimately, the judge will determine if the city’s plan is feasible and reasonable to creditors.
4:54 City attorney Bruce Bennett has finished for the day. He says he have about another hour tomorrow morning. Attorneys for the Detroit Institute of Arts and the Official Committee of Retirees say they each will have about 30 minutes of arguments supporting the city.
Attorneys for creditors who object – including Syncora, FGC, the UAW, AFSCME and Macomb, Oakland and Wayne counties – will follow.
4:40 Bruce Bennett’s opening arguments in the Detroit bankruptcy case first reviewed why the Detroit Institute of Arts collection shouldn’t be sold to pay creditors. Now he’s moved on to a discussion of what additional revenues could be available. Read: taxes.
He’s currently discussing why no additional monies are available from property owners, residents or workers in the city.
“Raising taxes now is not compatible with the goal of saving the city,” Bennett said. “Raising taxes could cause the city or any municipality to go into a state of decline it can’t escape from.”
4:17 Opening arguments continue to focus on what started as “the DIA Settlement” that became the “Grand Bargain” when the state got involved, as described by city attorney Bruce Bennett.
Not only is the museum an asset, it’s one that could be used to help lure residents back to the city, Bennett argued. But he continues to insist the art, by law, does not need to be sold to pay debt.
“I don’t think any of the donors thought the art would be or could be sold to fill potholes, pay for the collection of garbage, or pay for any city services…” he said.
The donated art, he said, went to the DIA Corp., not the city.
3:58 The Grand Bargain is being outlined, specifically the transference of the art to a new nonprofit, and the legality of it. Attorney Bruce Bennett reviewed Michigan Attorney General Bill Schuette’s opinion (found here) related to whether the city needed to sell the art to pay creditors.
Bennett is now dismissing why a loan secured by the artwork is not a good idea. Creditors last week proposed such a plan.
He also says the conditions of the foundation money toward the grand bargain were keeping the art secure and the conditions attached to the state money included the prohibition on litigation. (Recall: pensioners waived their rights to sue the state related to emergency manager law or constitutional protection of pensions with their favorable vote on the city’s Plan of Adjustment.)
3:41 City attorney Bruce Bennett got right to addressing the issue of whether the collection at the Detroit Institute of Arts can be sold to pay creditors in the city’s bankruptcy case:
“An unsecured creditor doesn’t have a general claim against all property of a Michigan municipality. … What the objectors have done is cited basically five cases where the proposition that something about the “best-interest” test requires the use of city-owned assets to provide recovery. … We’ve just seen that there’s nothing in Michigan law that supports that conclusion or supports that argument. So what is it about Chapter 9, if anything, that expands the rights of an unsecured creditor in a bankruptcy? … the answer: nothing. There are, of course, provisions of Chapter 9 that reduce or limit creditors’ rights.”
3:33 More from Bruce Bennett’s opening arguments:
“We are here today finally to obtain that help and the purpose is no less than to save the city of Detroit. The city needs more net revenue than it has to provide adequate services and service legacy debs. … Detroit’s won’t survive if it isn’t done.
The proposed Plan of Adjustment eliminates $7 billion of the city’s $18 billion of debt and provides for $1.7 billion in investments over the next decade.
“The city believes the investment will be sufficient to address the city’s most pressing needs. … The city believes the planned investment will be sufficient to rehabilitate the city.”
3:30 City attorney Bruce Bennett began opening arguments at 3:20 p.m.. He started with listing some of the reasons for and results of the city’s bankruptcy: depopulation, blight, a deterioration of the quality of life.
“The city no longer has the resources to provide its residents with the basic services,” he said.
He called the city’s operations “wasteful and inefficient” and described “much of” the city’s police and fire equipment and technology as “obsolete.”
The Chapter 9 reorganization, Bennett said, can help reverse the decline, attract new residents and businesses and “reinvigorate” Detroit.
“The city needs help,” he said. “During the roughly past year, progress has been made.”
3:15 Judge Rhodes denies all of the motions except the one seeking to prevent the testimony of city attorney Evan Miller.
The Court is on break until 2:10 p.m. when Judge Rhodes will hear one more pretrial motion and issue his decision on all of the other ones argued today. Then opening arguments will start.
UAW attorney Peter DeChiara says Miller “is THE most knowledge person” on pensions and benefits and how the bankruptcy might affect the pensions and health care benefits for the Detroit Public Library. “We do not seek privileged information from him,” DeChiara said.
(The UAW represents library employees and is seeking to determine the library’s long-term obligations to pension and benefits funding.)
“It’s not the lawyer’s’ job to testify in support of the plan,” Judge Rhodes told him.
“I agree with you in general, however in this case, the individual who represents the city and has the knowledge to answer the questions that are relevant to the UAW’s case happens to be with Jones Day,” DeChiara said.
12:19 Judge Rhodes asks who else wants to be heard on any of the pretrial motions.
First, Robert Gordon, attorney for the city’s retirement system, said the city was able to assess the impact of the plan on retirees.
Barbara Patek, attorney for the Detroit Police Officers Association, used the phrase “business justification” for plan confirmation, though she was addressing the human dimension of bankruptcy and its affect on pensioners and employees. Neither she nor the judge could come up with a better term than “business justification.” Patek said because this is a municipal bankruptcy case, assets cannot just be divvied up – city services need to continue.
11:54 FGIC Attorney Ed Soto is now arguing that the city should not be allowed to present testimony and evidence about the validity of the $1.4 billion pension funding deal from 2005, also known as the Certificates of Participation claims. Here is the motion filed on the issue.
(For background, a succinct history of the COPs deal — and a description of some of the surrounding legal issues — can be found here. The city has a pending lawsuit challenging the legality of the COPs deal.)
Soto also argued the city should not be allowed to present evidence that would show the potential hardships that would be suffered by pensioners. Here is the motion on that issue. A few months ago, Judge Steven Rhodes declined to allow Syncora access to information about individual pensioners’ financial information and assets.
11:32 Ed Soto, an attorney for bond insurer Financial Guaranty Insurance Company is critical of the court’s mediation order, claiming it has been too broadly interpreted and has prevented discovery by creditors in pre-trial preparations.
Syncora originally challenged the order in this motion, which the judge is being asked to rule on today in advance of the trial.
The court’s mediation order has been unsuccessfully challenged by some creditors, including FGIC and Syncora, who wanted documents and witness testimony about how they grand bargain came about. They were unable to get it because the mediation order (ensuring confidentiality related to the negotiations) prevented their release.
Soto described how Rip Rapson and Dan Gilbert have given contradictory statements — both publicly and in depositions — and creditors’ attorneys could not question them about the discrepancies because of the mediation order. Rapson is the president of the Kresge Foundation, a donor to the grand bargain, while Gilbert is chairman and founder of Rock Ventures and Quicken Loans.
Soto contended the lack of discovery prejudiced some parties as they attempted to prepare for trial and argue that the city’s PLan of Adjustment unfairly discriminates against some creditors, which could be grounds for the judge to reject its confirmation. “No one group should be allowed to benefit from (the mediation order),” Soto said. “These are issues that have handicapped us.”
“Your argument assumes that the reasonableness of some other plan is before the court, it’s not,” Judge Rhodes said at one point.
“My argument goes to whether there is sufficient discovery that would allow evidence that but for this money going toward the pensioners, (the grand bargain) would not have happened,” Soto said.
Syncora attorney Stephen Hackney called it a “fundamental due process order” and argued for the mediation order to be lifted.
In response, city attorney Greg Shumaker said Emergency Manager Kevyn Orr would testify about what came out of the mediation, specifically the grand bargain, not what happened in the mediations or what was said to the foundations during the process. Shumaker said, contrary to what Syncora and FGIC attorneys said, the city is not selectively using the mediation privilege.
10:59 Internet Service Interruption in the Media Room….but here’s what’s been happening:
Stephen Hackney, attorney for bond insurer Syncora, is arguing a motion previously filed that would preclude the city from introducing evidence related to how much less pensioners would receive if the “grand bargain” funding was not included. The grand bargain is the agreement to bring $660 million of state, private, foundation and corporate money to pension funds so that retirees suffer smaller cuts to their monthly payments. “These are recoveries under the Plan,” Hackney says.
Syncora stands to lose hundreds of millions of dollars in the bankruptcy case, as the Plan of Adjustment now stands. The Bermuda-based company’s attorneys have consistently argued that they are experiencing “unfair discrimination” under the plan, in part, because the grand bargain monies only benefit pensioners, not financial creditors. Syncora also wants Detroit Institute of Arts’ holdings to be sold to pay creditors.
City attorney Greg Shumaker. of Jones Day, is reviewing the state contribution agreement ($98 million to the General Retirement System and $96 million to Police and Fire Retirement System) and making other legal arguments related to procedure and what will be introduced.
“It’s really tough to tell what Syncora wants to prevent the city from putting on,” he says. “It’ a legal issue but in fact, there’s no doubt that there’s a lot of evidence that’s going to be put on related to the grand bargain. … ”
10:38 The city is represented by several attorneys who are up front in the courtroom today. Among them (linked to their bios):
10:30 While the attorneys are still dealing with pre-trial issues, here are a few live blogs to follow. They’re all done by reporters who have been here for the duration of the case. (Let’s just say there are a lot of new faces in and around the media room today)
10:27 Tweeting from court today (going counterclockwise around the media room) are @WDETSandra, @NathanBomey, @MattHelms, @ChadLivengood, @CharlieLangton. @RobertSnell and @RoopRajFox2 are elsewhere in the federal courthouse.
10:05 Attorneys for the city and creditors are discussing witnesses, exhibits and other items related to procedures at trial, which will begin later today. Most witnesses will be sequestered.
8:30 a.m. For more than an hour, Judge Steven Rhodes heard arguments for and against issuing a temporary restraining order that would halt water shutoffs in the city. A summary is here.
It was Syncora’s “Alternative Universe” argument.
An attorney for the bond insurer asked Judge Steven Rhodes to consider the Detroit bankruptcy case from the perspective of the financial creditor in a creative nine-minute narrative on Monday that was part of a bigger hearing.
Part Mad Libs, part legal strategy, part emotional appeal, Syncora attorney Stephen Hackney essentially replaced “pensioners” with “bondholders” as he attempted to demonstrate how some of the dynamics of the historic bankruptcy case would have played out if the parties who would benefit from some of the settlements were changed.
Syncora stands to lose hundreds of millions of dollars as the city’s Plan of Adjustment now stands and has objected at seemingly every step of the proceedings to date. The company’s recent filing objecting to the plan attacks the negotiations related to the “Grand Bargain” and criticizes the mediators for some of their actions and public statements. Following that filing, the city asked the judge to strike it from the record and to sanction Hackney and his partners. On Monday, attorneys for the two sides argued in front of Rhodes who said he would rule before trial starts Sept. 2.
The court released the audio today, and we transcribed part of it. Click on the underlined names, terms or phrases for explanation and context.
What I was thinking about your Honor, is the problem when you are a hated minority is that there can be bias that creeps into the system, and as I was preparing for this argument I was thinking about John Rawls and what he said about the “veil of ignorance” and how you can use the “veil of ignorance” to try and assist yourself as a policymaker to make sure that you don’t know who is who when you come to any particular circumstance and you make the decision about the fairness or rightness of something blind to who you are in the scenario and I was thinking how can I convey to Judge Rhodes, how can I put the “veil of ignorance” on him to decide this motion as if it weren’t once again hated Syncora, the obstructionist, Mr. Cullen (an attorney for the city who used this phrasing in an earlier argument) says we have a gun to the city’s head. How can I help him do that? So what I would like to do and I will not take forever to do this but I would ask you to hear me briefly on this, which is consider the following alternative universe which is:
The city of Detroit files for bankruptcy and a mediation team is appointed and while one of the members of the mediation team, his wife does sit on the board of the DIA or did, she’s a director emerita, the chief mediator tells everyone that that individual will be mediating issues relating to the invalidity of the COPs and everyone goes on from there.
Now Ms. Neville and Mr. Gordon who are fierce advocates on behalf of the retirees who I’ve gotten to know through this case and have done a great job for their clients, they are certainly concerned about what is going on in connection with this, but they are, you know, representing their own clients and trying to do the best that they can do for them. So they move on.
What happens next, your Honor, is you begin to hear some rumblings about the fact that there is some deal out there involving the art that will ultimately bring money into the city, and you aren’t sure about what exactly, how this is coming about. You aren’t sure exactly what he structure of it is and you won’t be for months and months and months, but you hear people saying things like “It’s important for it to protect the city’s credit rating which is the lifeblood of the city.” And as matters proceed very quickly from rumblings in mid December to in mid January an announcement that there will be contributions by foundations that are designed to protect the credit rating of the city which is the lifeblood of the city.
And there is an announcement that the monies will go solely to the city’s bondholders. They will not go at all to the retirees, and there are statements by people to the effect of “the retirees, those legacy costs, they were 80 percent of the problem that put this city into bankruptcy. They caused it. The unions broke this city. We shouldn’t punish the financial creditors for the fact that they got caught up in a fight between Detroit and its own unions. It’s not their fault. We have to protect the credit rating of the city. We need to get money for this art. This is a great thing.”
Now, the retirees’ lawyers who are fierce advocates are absolutely appalled by what they are seeing. They’re also confused. They don’t know how the transaction came about. They don’t know who decided that the money would all go to one particular creditor and not to another, and they are very concerned. So what they want to do is they want to set out and take discovery and find out what happened on this. But there’s a bigger problem. And the bigger problem is that the city and the mediators, whoever it was that decided to make that public announcement that the grand bargain funds would come in and that they would all go solely to the bondholders, they made the announcement before they actually got the bondholders to say that that would be sufficient. No indenture trustee. No monoline insurer actually came in and said, “yeah, if you give us everything that relates to the art, we’ll take that and we’ll be done.”
They never say that so what happens is as the mediation team and the city front run this by announcing this, they hand the keys of the bankruptcy over to the bondholders, and the bondholders now realize the city is on record saying two things: “I am absolutely essential to the future of the city, and the charitable foundations are insisting not only that I get all of the money but also that I approve the plan.”
What Ms. Neville and Mr. Gordon see before they’re able to take any discovery or figure out what is going on, is they see a sequence of events where not only do the bondholders get all of the amount of the money from the Grand Bargain, but when there’s an additional $200 million settlement and 74 cents on the dollar or whatever the approximate amount of that was, the 26 cents that was leftover goes to the bondholders. When the Obama Administration makes $100 million in blight fees available to the city, blight amounts don’t go up by $100 million, it’s part of an improved deal for the bondholders. When there is a DWSD transaction and they agree that over the next nine years the DWSD will make substantial payments to the bondholders, they seek to invalidate the pensions under the theory that the pensions were obtained by corrupt means because of the fact that the unions had always controlled Detroit, there was no good arm’s length negotiation and so they ought to invalidate those things, they told the bondholders you’ll get 65 percent of the reserve they’ve set up to litigate that claim.
With all this in hand, now that they do have profound recoveries in the case by any standard, now the bondholders come in and approve the deal.
Now, Ms. Neville wants to pick up her pen and write an objection but she can’t because she has an aneurysm and is taken to the hospital because she is absolutely infuriated about what’s happened here. So what she does, she doesn’t know how this has come together. She’s seen it all play out in front of her, and it doesn’t feel right to her. She begins to try and take discovery. She is stopped at every stage in the process.
She tries to find out what happened on the charitable foundation side. She can’t. She tries to find out from Kevyn Orr, “what happened with what you were thinking?” And he very solemnly tells her, “even though there have been many published statements in the press about this particular deal, oh, I’m sorry. Now I can’t say anything with respect to that.”
Now at the same time that she’s getting blocked at every turn, trying to develop this evidence, she is watching something else unfold in public, which is the chief mediator is lobbying the legislature to pass the needed legislation to get the deal. He’s holding press conferences, and in the press conferences he’s saying things like, “We need to remember that this Grand Bargain, what it’s really about and what it’s really about is Detroit’s financial creditors, The bondholders who have built our hospitals and our sewer system and kept our city running for so long. That’s what this is really about.”
And he turns to a group of people at the DIA and he says “And I’d like to recognize one of the heroes of this bankruptcy and that hero is Claude LeBlanc. He’s the chief restructuring officer of Syncora, and I want us all to stand up and applaud Claude LeBlanc as one of the heroes of the bankruptcy.” And he also quotes FGIC’s CEO but I don’t know who that is so I can’t put it in.
Ms. Neville’s also about to learn something else. She’s about to learn in a video from one of the foundations that very early on, the mediator who all agreed, the chief mediator, is described as a powerful man in the city, and he is a powerful man in the city, that this powerful man came to him and said, “there are two issues that are going to tie this bankruptcy up. No. 1 is the art, and No. 2 is the city’s credit rating. This city can’t function without a credit rating. If we try to invalidate those COPs, if we try and say General Obligation Bonds aren’t secure, it’s going to go all the way to the Supreme Court and so will the art. And so we’ve got to take care of that and what I’d like you to do is can you put together some of your friends and come in and make a contributions, solely, we’ll make sure it goes solely to the bondholders.We won’t let those retirees get any of this. Absolutely not. We know they’re part of the problem. They were crazy to have allowed themselves to continue to work for the city with deferred compensation. They live here. They know the politicians. Their unions are the ones that run things around here. They’re getting what they deserve. But you bondholders. We’re going to do it like Central Falls. We’re not going to let you get caught in the middle of this.”
That’s what Ms. Neville says. Now, I would like to ask you something, your Honor. Take the “veil of ignorance” that John Rawls talked about for a moment and ask yourself, in that parallel universe, do you seriously think you are engaging a motion to strike Ms. Neville’s supplemental objection that she files where she says that it ain’t right and it’s not consistent with good faith and that she didn’t know what was going on and that this is the best she’s been able to piece together from the outside? Let’s have a trial on the merits of this case, your Honor.
Let’s not be striking things off and cutting them off before we have an opportunity to at least be heard. That is all we are asking.