DETROIT — DETROIT (AP) — Attorneys gave closing arguments Friday in a rare trial to determine whether Detroit can become the largest municipality to fix its finances in bankruptcy court.
The daylong remarks for and against Chapter 9 reorganization now will be sorted out by Judge Steven Rhodes, who could take days to make a decision.
A parade of attorneys, representing the city and state on one side and retirees, unions and pension funds on the other, took turns rehashing and dissecting evidence from the eight-day trial, including testimony from Michigan Gov. Rick Snyder and the man he hired to turn around Detroit, emergency manager Kevyn Orr.
Critics repeatedly have claimed Orr sought bankruptcy for months and didn't want to try good-faith negotiations before filing. Lawyers for Orr and Snyder counter that bankruptcy always was a last resort and only came after careful, deliberative planning and a failure to find common ground.
Rhodes was far from a passive observer. The judge sharply questioned the lawyers, even digging into passage of the law that put emergency managers like Orr in distressed Michigan cities.
Robert Gordon, a lawyer for Detroit's pension funds, said the city ran "roughshod" over a clause in the Michigan Constitution that protects public pensions. In response, the judge asked why fund managers didn't submit evidence of a viable alternative to cutting pensions, even if the actual amount of any shortfall was disputed.
"I would have been happy to have that conversation if there was an opportunity to," Gordon replied, noting there was scarcely more than a month between the June meeting with creditors and the bankruptcy filing. "There were major pieces of information missing here that made it impossible ... to have that discussion at this stage."
Late in the day, Rhodes challenged statements Orr made during a public meeting in June, more than a month before the bankruptcy filing. He grilled Orr earlier in the trial and on Friday jabbed Detroit's lead counsel, Bruce Bennett, over the remarks in which Orr told a retiree that pensions were "sacrosanct" and "can't be touched" based on the constitution.
Orr testified Monday that rights to a full pension could be trumped by federal law in a bankruptcy.
Rhodes asked how the earlier statement — as well as another by Orr in which he said the odds of bankruptcy were "50-50" — should affect analysis of the issue of whether the city negotiated with good faith — a key issue of the trial. Rhodes wondered if that calls into question what Orr "really thought."
Bennett chalked up Orr's remarks to a "mistake" that was corrected a few days later, and said that shouldn't discredit the city's contention that it tried to negotiate in good faith. Bennett said it represents a good effort by critics to "impeach" Orr but not his efforts leading up to the bankruptcy filing.
Orr, a bankruptcy expert who was appointed emergency manager last March by the governor, has said Detroit has at least $18 billion in long-term debt, including $3.5 billion in pension shortfalls.
If Detroit is found eligible to stay in bankruptcy, the case would turn to how to solve the debt. The city has said it could propose a plan by the end of the year. Meanwhile, a team of mediators has been meeting with all sides in the hope of reaching an out-of-court compromise.
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Could Detroit Come Back After Bankruptcy?
We combed through Detroit Emergency Manager Kevyn Orr's 150-page-plus restructuring plan he released to the public in June 2013, weeks before the city's bankruptcy filing, after meeting with bondholders. Orr met with those creditors to negotiate Detroit's structural long-term debt, now said to total over $18 billion. Along with finances, the plan proposes 10 years' worth of improvements, priorities and changes that will affect residents, businesses, neighborhoods and visitors. Click through the slideshow to read our analysis of how Detroit could change after bankruptcy. You can see the nitty-gritty details for yourself by <a href="http://www.huffingtonpost.com/2013/06/14/detroit-restructuring-plan-bankruptcy-kevyn-orr_n_3442263.html?utm_hp_ref=detroit" target="_blank">reading the full report here</a>.
Mayor Dave Bing launched a program in April 2010 with the goal of demolishing 10,000 vacant structures by the end of his term. Over 5,000 of those abandoned buildings have been torn down, with the remainder scheduled to go by the end of 2013. But there was never enough money to fully rid Detroit of its blighted buildings. Orr's report says a funding gap of $40 million exists before Bing's goal can be completed. And while 10,000 demolitions is an insanely high number, Orr's report says that only covers 13 percent of the city's vacant buildings, and 26 percent of those that have been deemed dangerous.
Orr's restructuring plan presents a number of ways the city can speed up blight removal. One tactic involves coordinating and simplifying the myriad local, regional and national agencies and statutes that regulate demolitions. Another priority is moving blighted land through the demolition process faster, in order to return those properties to private ownership (Pages 72 and 73). Police and fire departments will integrate their data so demolitions can be targeted to reduce crime and arson. Orr's budget calls for $50 million annually in 2014 and 2015 to battle blight, to be increased to $100 million each year for 2016 through 2018. Some of that money will have to be raised through grants and public-private partnerships.
According to the city's preliminary analysis, Detroit hasn't kept up on its obligations to beneficiaries of the General Retirement System and Detroit's Police & Fire Retirement System. By how much? A staggering $3.5 billion, says Orr, who writes, "At this level of underfunding, the City would have to contribute approximately $200 million to $350 million annually to fully fund currently accrued, vested benefits. Such contributions will not be made under the plan."
Retiree Health Benefits
Under Orr's plan, pension funds would receive a proportional (pro rata) share of $2 billion in notes that the city would issue. But since that share of $2 billion won't equal the total amount of unfunded pension costs, the report notes, pensioners should expect "significant cuts in accrued, vested pension amounts for both active and currently retired persons." According to the Detroit Free Press, retiree health benefits will likely be<a href="http://www.freep.com/article/20130614/NEWS01/306140084" target="_blank"> transferred to modified medical benefit plans</a> that will come into effect with the Affordable Care Act. Those over the age of 65 would be transitioned to Medicare.
Hiring a new police chief was the first task on Kevyn Orr's Detroit Police checklist, but it's not the only change he recommends. Orr envisions using a data-driven approach to restructure DPD from top-to-bottom. Another priority is improving officer morale and giving the force the tools they need to do their jobs: bulletproof vests, tasers, vehicles and functional IT. He's also a fan of the "Broken Windows" policing theory piloted last year in the city's Rosedale Park neighborhood. In total, Orr plans to spend $26 million more on DPD in 2014, with an additional $66 million investment over the next four years.
It should come as no surprise to readers that Detroit is bonded to the hilt. Creditors may take a <em>huge</em> hit on payments from the city, reportedly as little as 10 cents on the dollar. Orr has stopped paying some debts entirely, and his plan calls for reinvesting that money into city services after bankruptcy.
Detroit Fire Department
Aging fleets of fire engines and facilities to maintain them threaten the impact of the Detroit Fire Department, which responds to around 30,000 calls every year. The restructuring plan calls for at least $6 million in additional investment over the next five years, with an $18.4 million facility investment in 2017. But the restructuring plan doesn't talk about hiring any more fire investigators -- as of Dec. 2012, the <a href="http://www.myfoxdetroit.com/story/20388988/detroit-only-has-12-arson-investigators-for-5000-fires-annually" target="_blank">department only had 12 on staff</a> to investigate more than 5,000 suspicious fires set in the city's neighborhoods every year.
The restructuring plan mentions that DDOT, Detroit's underfunded bus system, could eventually be merged with a private company or SMART, the suburban public transportation system. There's also talk of bringing DDOT under the control of the new <a href="http://www.huffingtonpost.com/2013/07/12/rta-detroit_n_3586137.html" target="_blank">regional transit authority</a>. A consultant is apparently studying long-term solutions, including outsourcing (Pages 74 and 75). While it could make more sense long-term to have all of the region's transit under one umbrella, the RTA is too new to make that determination and doesn't yet have funding. In the event of a merger, gains in savings and efficiency may be balanced with layoffs.
Managing and maintaining the 982-acre Belle Isle Park costs the city of Detroit some $6 million annually. Orr's verdict on Belle Isle comes as no surprise: He says the city "intends to enter into lease transaction with State on generally the same terms as the State’s prior proposal," though no timetable is given (Page 87). That means "Detroit's crown jewel" is slated to become a state park managed by the Michigan Department of Natural Resources. Under the <a href="http://www.huffingtonpost.com/2013/01/29/belle-isle-state-park-plan-dead_n_2575256.html" target="_blank">previous 30-year lease proposal</a>, pedestrians and bikers would still be able to access the park for free. Motor vehicles would have to pay an annual $11 Recreation Passport fee to the MDNR, good for accessing any state park.
36th District Court
Orr proposes possibly transitioning to "paperless" transactions at the 36th District Court (Page 73). Welcome to the 21st century, guys!
Residents Who Work Outside The City
Orr's report proposes levying an income tax for reverse commuters -- those who live in Detroit but work outside the city (Page 81). The City loses approximately $30 to $45 million of income tax revenue every year, claimed to be 15 to 20 percent of the total tax collected, from reverse commuter non-filers. Expect new legislation to tax these residents.