Detroit on the Razor’s Edge: Day III. In the third day of municipal bankruptcy hearings before U.S. Bankruptcy Judge Rhodes on the Motor city’s eligibility for chapter 9 municipal bankruptcy, creditors cross-examined Ken Buckfire, the city’s investment banker, for much of the day, before calling up Detroit Emergency Manager Kevyn Orr. Creditor attorneys are trying to prove that Emergency Manager Orr and the State of Michigan were determined to file for bankruptcy in order to cut pensions, and that they did not negotiate in good faith with the city’s creditors. Detroit Emergency Manager Kevyn Orr made his first court appearance late Friday to testify in the city’s historic bankruptcy trial; he was called as the final of five witnesses for the city, which is trying to prove that it is legally eligible to enter Chapter 9 protection. During his testimony, Mr. Buckfire disclosed Detroit’s plans to pay unsecured creditors 16 cents on the dollar. That is greater than previous reports, proposing that creditors would get less than 10 cents on the dollar. Pensioners are considered unsecured creditors; it marks how great the stakes are in this hearing.

Pensions. Mr. Buckfire testified that the need to cut pensions was a matter of simple math, stating that he knew the state was considering bankruptcy as an option for the city as early as spring 2012—but an option, he testified, that he advised Governor Snyder should be “avoided at all costs,” albeit it still needed to be considered as a last resort. He also responded that his team did not give much weight to the state’s constitutional protection of the city’s pensions before unveiling Mr. Orr’s June restructuring proposal: “They [pensions] don’t have security. We did give it some weight, but did not deem it relevant.” Mr. Buckfire also responded to a follow-up question by saying that he never spoke directly with Mr. Orr about the need to cut pensions and other retirement benefits, because it was so obvious: “Are you saying it was so self-evident that no one had to say it?” an attorney for a committee representing the city’s retirees asked. “Yes,” Mr. Buckfire responded.

Good Faith Negotiations? In addition to insolvency, a key hurdle the city must clear for Judge Rhodes to determine it is eligible for municipal bankruptcy is whether negotiations with its more than 100,000 creditors were conducted in good faith. Ergo, a good portion of the day Friday was devoted to a key claim made by attorneys representing the city’s unions, retirees, and pension funds that Orr and his team were intent on filing for municipal bankruptcy: they did not make best efforts to negotiate with them prior to the bankruptcy filing. They also claimed that plans to cut pensions would violate the Michigan Constitution. However, Mr. Buckfire testified he did not have to recommend to Mr. Orr that pensions for the city’s retirees be cut as a way to help Detroit regain solvency; he testified it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them: “It was a function of the mathematics.” In a follow-up, Claude Montgomery, an attorney for a committee of retirees that was created by Judge Rhodes, asked “Are you saying it was so self-evident that no one had to say it?” “Yes,” Mr. Buckfire answered, who subsequently testified the city plans to pay unsecured creditors, including the city’s retirees, 16 cents on the dollar (There are about 23,500 city retirees.). The city has said about half of its liabilities stem from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions. UAW attorney Peter DeChiara, during the hearing, stated Mr. Buckfire was no more qualified to answer city financial questions than the cab driver who drove him to court: “The court would not have allowed the taxi driver to answer those questions. Mr. Buckfire is no more qualified to answer those questions than the taxi driver.” Judge Rhodes, in his ruling, however, said he would not have allowed testimony from a cab driver, but he would from the financial experts.

Timing. Another key issue in these hearings relates to good faith: timing. Was the bankruptcy filed in order to get around the Michigan constitution’s pension protections? In an exchange with attorney Lynn Brimer, representing the Retired Detroit Police Members Association, Mr. Buckfire testified that the state and Jones Day were discussing filing for a Chapter 9 bankruptcy at least as early as March 2012; nevertheless, he said negotiating with creditors was preferable and that bankruptcy was an option of last resort. He testified that Mr. Orr told him that Detroit had decided to file for Chapter 9 bankruptcy on July 18th, rather than the 19th, as had been planned, because “[T]hey were concerned about losing control of the process.” The city’s historic filing on July 18 came less than 10 minutes before lawyers for the city’s pension funds and retirees had rushed to a state court to try to block it, according to attorneys who were present in a Lansing, Michigan, courthouse at the time. The two pension funds were seeking to safeguard Detroit retiree pension benefits by challenging the authority of  Governor Snyder to authorize a bankruptcy proceeding, because of protections for pensions in Michigan’s constitution.

Kevyn Orr. The emergency manager testified only briefly before the court ended for the day, when he testified he did not speak about filing for Chapter 9 municipal bankruptcy in his first meetings with Michigan state officials before he was named to his post. He will resume this morning, in what may be the most critical testimony, as Detroit seeks to establish a case that it is bankrupt and has a right to work out its stark financial problems under protection of a bankruptcy court. Mr. Orr said he first met with Gov. Rick Snyder’s staff on January 29 when representing his former law firm, Jones Day, as part of a team pitching to advise the state on how to restructure Detroit. He subsequently met several times with Michigan officials last February, but, in response to questions, he testified a Chapter 9 filing was not discussed in those meetings. He described his background before coming to the city, including work on the Chrysler bankruptcy, his initial meetings with the state, and the substandard services he found when he came to Detroit to take the job.  Mr. Orr said he met with Gov. Rick Snyder in February, a month after being asked by an aide to Governor Snyder if he was interested in the job. The offer came the day after Jones Day, Mr. Orr’s firm at the time, made its presentation to the city to be its law firm for the restructuring. He testified his role in the Chrysler bankruptcy was to decide which dealerships should be closed. He will take the stand again this morning.

Public Safety. In testimony earlier on Friday, Detroit Police Chief James Craig, whom Orr appointed on July 1, mainly spoke of the “deplorable” condition of the department when he assumed the job. Two-thirds of the city’s police cars were worn out, and it took 50 minutes on average for Detroit police to respond to an emergency call, Chief Craig said.  Chief Craig, a Detroit native, who returned after service as police chief in Cincinnati and Portland, Oregon, and after more than two decades at the Los Angeles Police Department, compared Detroit’s response time with those in other cities―noted it takes seven minutes in Los Angeles, five to six minutes in Cincinnati, and three to four minutes in Portland for police to respond to an emergency call. Chief Craig described how the city’s bleak fiscal position endangers its residents, as he testified about the horrible conditions of the police force, morale, cars, equipment, and the resultant poor response time. He testified that so many bulletproof vests were too old to be used safely that there was not one for him: “I brought my own.” he said. The Chief cited stories about police vehicles that have to get pushed to get started, bodies left at fire scenes, because no one found them, a dirty police station, and an officer whose job it was to wash the chief’s car (a practice which he testified he put an end to.). He also reduced the executive protection unit assigned to protect the mayor from 26 officers to six. Chief Craig summed it up: “Everything’s broken…Deplorable conditions. Crime is extremely high, morale low.”

Lesser or Greater Creditors? One issue in the hearings revolves around Detroit’s options to escape or exit insolvency—or, in bankruptcy, priority amongst creditors. Thus, there has been great debate about the city-owned Detroit Institute of Art or DIA. Mr. Buckfire said he called Christie’s on behalf of the city last May and met with them in May or June. The auction house said evaluating the DIA art collection would take months, and it did not begin until last month, so, as yet, there are no preliminary reports. The city is paying Christie’s $200,000 to value the collection. No efforts have been made to sell pieces to satisfy creditors. Asked about internal DIA e-mails suggesting the city would file for bankruptcy in July, Mr. Buckfire said the information did not come from him. “I never shared with anybody at the DIA that the bankruptcy filing would likely be in July,” he said under questioning from Jennifer Green, attorney for the retiree systems.

Gov. Rick Snyder will testify today at 1p.m.; Detroit emergency manager Kevyn Orr is expected to continue with his appearance this morning. When Orr returns to the stand this morning, he likely will be asked to explain his efforts to negotiate with the city’s numerous creditors, including retirees and pension funds, before the city filed for the largest-ever Chapter 9 municipal bankruptcy on July 18th. The trial will last at least through next week, and Judge Rhodes has set aside additional days in early November if needed.

Jiggering with the Recovery Plan. Commissioners David Carrington and Jimmie Stephens of Jefferson County Friday completed meetings in New York City with creditors in an effort to fine tune the county’s exit from chapter 9 municipal bankruptcy, seeking  new concessions from creditors, and warning that additional negotiations will be necessary with major creditors of the county’s debt-laden sewer system: “Even though progress has been made, more conversations are needed before the targeted level of creditor concessions is achieved…Due to the sensitive nature of the negotiations, we will have no further comment at this point in time.” Even though creditors have already agreed to $1.3 billion in cuts, county leaders now have determined they will need to gain $350 million in additional concessions in order to complete a refunding in December―a requisite to provide capital for the sewer system and allow the county to exit municipal bankruptcy. The New York meetings with JPMorgan, hedge funds, bond insurers, and liquidity banks holding $3.2 billion of defaulted warrants were forced due to rising interest rates, which have undermined the costs of the county’s planned refunding. The current offer proposes cash settlements resulting in investor losses from 20% to 70%. A confirmation hearing on the plan of adjustment is set for this week. The negotiations came as S&P on Friday upped its ratings on Jefferson County’s Series 2000 limited obligation school warrants to CCC from C, and the Series 2006 lease revenue warrants to CC from C, with the rating agency opining the county is likely to make full and timely payments on these obligations during the coming year: “The CCC rating reflects our view that the Series 2000 warrants are currently vulnerable to nonpayment, and depend upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.” The county is current on all payments. The CC rating on the 2006 lease revenue warrants is due to the fact that they are impaired under the plan “and we expect default to be a virtual certainty.”  The county entered into a new lease agreement with the Jefferson County Public Building Authority on Jan. 1, which calls for partial support of debt service from Ambac Assurance Corp. in 2016. The county’s partial debt-service payment at that time is considered a “certain default,” S&P said.



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