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Duggan, Jones take the stand in Detroit bankrutpcy trial; court adjourned until next week

Oct 7, 2014

The city of Detroit wrapped up its case in bankruptcy court today, with Detroit’s two top elected officials as the final witnesses.

Mayor Mike Duggan and City Council President Brenda Jones both took the stand.

Their testimony is key, because the city needs to convince Judge Steven Rhodes that its proposed plan of adjustment is feasible—and that city leaders will work together to execute it post-bankruptcy.

Jones had publicly opposed emergency manager Kevyn Orr, and his decision to file for bankruptcy.

But on the stand, Jones said she’s come to believe the city will be “better off” for having gone through process.

And she promised the Council would work “collaboratively” with Duggan to improve services and maintain balanced budgets.

More on Jones’s testimony from WDET’s Sandra Svoboda at Next Chapter Detroit, one of Michigan Radio’s partners in the Detroit Journalism Cooperative:

“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…

“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.”

Duggan testified he believes the city’s restructuring plan is feasible, but also acknowledged it could be compromised by any number of factors outside the city’s control.

Again from Next Chapter Detroit:

“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.”

Duggan also testified he believes city services have improved under his administration--but added it's a "multi-year process," and "We're probably only 10% of where we need to be."

After Duggan's testimony, the city rested its case.

The city’s lone major holdout creditor, the Financial Guaranty Insurance Corp., then called Cynthia Thomas, the executive director of the city’s pension systems. She testified about forecasted rates of return, and how they affect the systems’ unfunded liabilities (a highly disputed point early in the bankruptcy—Orr pegs that number at more than $3 billion, but pension fund officials said it’s much less):

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.

Later, in response to a direct question from Judge Rhodes, Thomas said she believed the 2008 financial crisis and subsequent recession-- “the tremendous losses we suffered on our investments”—was the biggest single cause of pension underfunding.

After Thomas’s testimony, Judge Rhodes adjourned the case until next week—but not before he made what WDIV’s Rod Meloni called an “exceptionally interesting statement:”

"I am looking to have one more amended plan with settlements... SOON! [his emphasis] all but telling FGIC to end the trial by settling. There a couple of other small objectors it's just that FGIC is owed a billion dollars by the city and it doesn't have it. They're negotiating a land swap that could get to the settlement.”

This raises the possibility of a fully consensual resolution to Detroit’s bankruptcy—an outcome most legal experts thought was virtually impossible in the city’s huge, complex case involving thousands of creditors.

Most assumed the case would be resolved through a “cramdown”—meaning Judge Rhodes would approve a plan of adjustment over the objections of dissenting creditors. Rhodes needs to approve any proposed settlements, though, as well as the overall plan.

The trial is scheduled to resume October 14th.