Detroit Begins Week II in Federal Bankruptcy Court

September 8, 2014
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First Lap. The City of Detroit completed its first week of trial for its bankruptcy plan of adjustment, seeking to convince U.S. Bankruptcy Judge Steven Rhodes it has put together the right plan to eliminate debts, but proposed enough new investment to guarantee a sustainable future. The proposed plan includes cutting $12 billion in debt to about $5 billion and spending $1.7 billion over the next decade on quality-of-life improvements, especially demolition of thousands of abandoned homes. The city proposes spending the $1.4 billion on everything from blight removal to expanded bus service and improved police and firefighting to bring the city’s woeful public services up to an adequate level, a critical part of the overall prescription for keeping Detroit solvent and reversing decades of depopulation and disinvestment trends that laid the city low. On the other side of the ledger, the plan proposes to cut many retirees’ pensions by 4.5 percent. No tax increases are planned. And, the bitterest opponents of the city’s plan provided withering testimony opposing the Motor City’s plan, accusing plan architect Kevyn Orr, the state-appointed emergency manager, of using faulty logic and improper legal standards in creating a plan that favors the city’s retirees over other creditors—and demanding 75 cents on the dollar of what it claims it is owed as its bottom line. Key opponents, however, not only include financial insurers Syncora and Financial Guaranty Insurance Co., but also Detroit’s suburban neighbors, Wayne, Oakland, and Macomb Counties, whose attorneys laid out deep objections to the city’s plan, arguing the parts of the plan dealing with the Detroit Water and Sewerage Department are illegal and unfair.. Perhaps Detroit’s lead attorney best summed up what is at stake: “The purpose is no less than to save the city of Detroit…Detroit won’t recover or survive if this isn’t done.” Feasibility is one of the key tests U.S. Bankruptcy Judge Steven Rhodes must decide the city’s plans meets before he can approve the plan of adjustment—and that is an issue over which he will struggle in the wake of the report of his own expert witness he hired to assess the Motor City’s plan, Martha Kopacz, who, in her report to Judge Rhodes, found Mr. Orr’s plan feasible, but with significant questions about the commitment to following through and from whence the necessary funding would come. Judge Rhodes also has said that it is critical that Mayor Mike Duggan, the City Council, and other city leaders back the plan and its goals and will follow through in implementing it.

People, processes, and structure. Earlier Friday, the city’s chief financial officer, John Hill, returned to the stand to testify that he has been entrusted with the monumental task of rooting out impediments in the execution of Detroit’s debt-cutting plan. In his second day on the stand as Detroit’s first witness in its historic bankruptcy case, Mr. Hill fielded questions from Judge Rhodes about his role and confidence in the plan — and its feasibility. “It’s not going to be easy to implement,” Mr. Hill responded: “If you go into this thinking it will be, I believe you will fail.” Mr. Hill, who is supportive of the city’s debt-cutting plan, says he will oversee policy, processes and ensure accountability to improve the city’s condition. Repairing Detroit’s antiquated processes is a “race against time” to change the “crisis mentality,” he said. “All three of those things are needed in order to move Detroit to a new future…My responsibility is to make this plan real,” he added: “Also, to try to put the city in a place where it would be able to pay something eventually to these creditors. That’s the way I boil it down.”

5-alarm Debt Fire. Clearly, one of the memorable moments came with the testimony last Friday, when restructuring consultant Charles Moore told the federal court how badly the city needs new fire equipment, testifying that one Detroit fire station sets a soda can on top of a fax machine to act as an alarm. When there’s a call, the fax knocks the can to the ground, alerting firefighters. Mr. Moore also spent considerable time ion the stand detailing Mr. Orr’s plan to invest some $1.7 billion to improve city services. For Detroit police, the investment means $16 million in non-lethal Tasers, bulletproof vests and body cameras. The city would spend $91 million on new police cruisers, $59 million on new fire engines and ambulances and $19 million on firefighter coats, helmets, axes, saws, ladders, boots and breathing aides for firefighters.According to Mr. Moore, over the next decade, Detroit wants to spend almost $559 million improving public safety, reducing response times, closing more criminal cases and fixing outdated equipment and vehicles—and during which period, Mr. Moore Testified, Detroit will realize $483 million in additional revenue—testifying he had studied “any and all areas” in which the city could generate additional revenue, including new fees, fee increases, and additional grant dollars. Moore’s testimony, as a key expert behind Detroit’s plans to restructure city government, will be critical to the city making its case that its exit plan is feasible and will ensure a city that can remain solvent and improve the quality of life for residents long accustomed to shoddy public services. The cross examination of Mr. Moore will continue this morning.


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