Detroit — Emergency Manager Kevyn Orr’s restructuring plan was not a take-it-or-leave-it offer to creditors, he testified Monday during the city’s bankruptcy eligibility trial.
Orr made the statement during a stretch of testimony aimed at proving the city negotiated in good faith with creditors, particularly in unveiling a June proposal for creditors, including bondholders, retirees and unions.
“Did you tell the audience it was not negotiable?” the city’s bankruptcy lawyer Greg Shumaker asked Orr.
“No,” Orr said while recounting a meeting with creditors at Detroit Metropolitan Airport on June 14.
In May, Orr wrote a report to let residents know about the finances in clear terms. Its key quote: “This path is not sustainable.”
Orr said the depths of Detroit’s financial crisis was “somewhat shocking” to learn after his appointment in March.
Orr recounted his earliest days in office and his efforts to unravel the city’s financial condition.
He learned that in 2011, the city’s total liabilities were $12 billion. That figure grew to $14 billion a year later.
“Between my appointment and within a few weeks, the liability was $4 billion larger, about $18.5 billion total,” Orr testified Monday.
“Do you recall your general reaction upon learning about the cash and liabilities and revenue?” the city’s bankruptcy lawyer Greg Shumaker asked during direct examination.
“I knew things were bad but it was somewhat shocking how dire it was,” Orr said. “Within a few weeks of coming on board, I was informed several of our employees had checks bounce. The cash flow was so tight.”
He was asked about the city’s claim that it is insolvent — a key requirement for Chapter 9 bankruptcy relief.
“No one on a serious basis has ever disputed me that the city is insolvent,” Orr said.
He also testified about the city’s shoddy services, including blight and lights — or lack thereof — and said the goal is to provide a “C-plus” level of service for residents.
Orr’s early testimony Monday focused on how the city’s financial crisis has left services, including emergency medical responses, ranking at the bottom of major cities nationwide.
“Blight is endemic and apparent,” Orr testified during direct examination from Jones Day law firm lawyer Shumaker. “No one has ever said city services are adequate in Detroit.”
Services are so shoddy, Orr doesn’t expect to provide residents A-plus level of services. The goal, he said, is to raise the level to “C-plus.”
Orr said 20 percent of the city’s housing stock is blighted and 40 percent of streetlights are out across Detroit.
“Wide swaths of the city are unlighted,” Orr said. “And it’s not just that city lights are out. The city infrastructure is somewhat destroyed.”
Repairing underground electrical switches requires significant excavation, he said.
“Deferred maintenance has caused us to be, shall we say, very much behind the curve,” Orr said. “The grid is so old, and public lighting is so overworked, that private contractors and insurance companies won’t let them work on our lighting grid.”
Orr said he has tried to improve conditions by setting up a public lighting authority and setting aside $12 million plus a $1.8 million operational budget.
Orr is expected to spend about three hours on the witness stand before yielding to Gov. Rick Snyder, who has a four-hour window today.
That gives labor union attorneys a rare opportunity to grill the state’s chief executive under oath.
It’s an extraordinary appearance in an extraordinary case that wouldn’t be before U.S. Bankruptcy Judge Steven Rhodes if Snyder had not given Orr his blessing to seek court protection from Detroit’s creditors.
After agreeing to an unprecedented three-hour deposition in the bankruptcy case, Snyder is believed to be the first Michigan governor in modern history to testify under oath in open court. Several Lansing insiders and historians said they can’t recall a similar event in the last 50 years or more.
Unions are expected to pepper the Republican governor about the city’s path toward bankruptcy, his hiring of Orr and why he didn’t place any conditions on the bankruptcy prohibiting Orr from seeking cuts to earned pension benefits for 23,500 city retirees. Snyder’s testimony is expected to start at 1 p.m.
“It is our view that the governor, perhaps with the exception of Mr. Orr, may be the most important witness in this case,” United Auto Workers attorney Peter DeCharia said.
Courtroom legal fights are expected over Snyder’s prior invocation of attorney-client privilege for numerous deliberations with Orr in the presence of state and city lawyers, a contentious issue during his Oct. 9 deposition.
Rhodes, who has scheduled four hours of testimony for the governor so he has to come to court only once, has said he’ll handle disputes over privileged information on a case-by-case basis.
John Pottow, a bankruptcy law professor at the University of Michigan, said Snyder’s appearance in court will be a dramatic chapter of the bankruptcy trial.
“It’s not often you get a sitting governor dragged into court,” Pottow said. “I think it shows you the seriousness of the Detroit bankruptcy … and the tenacity of the objections.
“They are forcing the governor to defend his actions.”
Since taking office in 2011, the Republican governor’s administration has been deeply involved in trying to rein in Detroit’s chronic budget deficits through the implementation of new laws that led to Orr’s appointment and the bankruptcy filing. In addition to Snyder, city labor unions have subpoenaed outgoing state Treasurer Andy Dillon and two aides to Snyder and Dillon to testify in the trial as early as Tuesday.
Democrats have said Snyder’s authorization of bankruptcy — and possible cuts to municipal pensions because of it — could be a campaign issue against Snyder in next year’s election.
“It’s clear that Snyder’s been driving this process from Day One. He owns this bankruptcy,” Democratic political consultant Joe DiSano said. “Where the governor will get into political trouble is if he’s evasive and elusive just like he was in the recent deposition.
“That strategy of evasive and elusiveness is not acceptable in any circumstances, but especially when it comes to the machinations of the bankruptcy” filing.
Lansing Republican consultant John Truscott said Snyder’s testimony will be “uncharted territory,” but he doesn’t expect many fireworks because the governor went through similar questioning in his earlier deposition.
“They are wasting their time,” Truscott said. “He is smarter than” the union attorneys.
An accountant and business executive by trade, Snyder also is an attorney.
“He is not going to get tripped up in anything. … He will help solidify the case for bankruptcy,” Truscott said. “I view this as a show put on for (union) members rather than a legal strategy.”
Snyder said Friday at an event in Novi he views his testimony as “part of the process” of a massive bankruptcy case that’s speeding along.
Douglas Bernstein, a Bloomfield Hills bankruptcy attorney, said Snyder’s testimony will be a “piece of the puzzle” of whether Detroit qualifies for bankruptcy, going to the heart of whether the city negotiated in good faith before filing.
Bernstein said the union may try to establish inconsistencies between his deposition and live testimony. But as long as he is consistent, Bernstein said he doesn’t expect many surprises.
“I don’t remember anything all that earth-shattering that came out” in his deposition, Bernstein said.
The biggest revelation Snyder made in the deposition had little connection to the bankruptcy filing. Snyder testified he doesn’t know who donates to a fund paying for some of Orr’s hotel and airfare bills.
Bernstein said Snyder could have fought having to testify live.
“I think he wanted to avoid the perception that he is hiding something,” Bernstein said. “This is demonstrating the governor is upfront.”
Stuart Gold, a Southfield bankruptcy attorney, said having Snyder testify is a “pretty big deal” in a Chapter 9 case that is already breaking “all new ground” as the nation’s largest municipal filing.
He said union attorneys will do their best to establish that bankruptcy was “predetermined” by Snyder and Orr months before the July 18 filing.
“The unions certainly suggest that the filing of bankruptcy was the first option rather than the last one … that (Orr and Snyder) weren’t in a mode to negotiate,” Gold said.
AFSCME union leader Ed McNeil said he’s looking forward to Snyder’s testimony and finally hearing him questioned in public about the bankruptcy and fate of public pensions.
“He was the first one to talk about being transparent, but we’ve seen everything but him being transparent,” McNeil said.
Truscott dismissed arguments from labor unions that Snyder is hiding behind attorney-client privilege on discussions with Orr before the bankruptcy.
“There has to be protections otherwise you couldn’t make a decision as leaders,” said Truscott, who was former Gov. John Engler’s press secretary. “Everything would be exposed.”
Snyder’s only solace is photographic cameras and video and recording devices are banned inside federal courtrooms, DiSano said.
Media can’t record audio, but there is an audio recording the court makes publicly available.
“The governor is dodging a major bullet by not having cameras on him,” DiSano said.