Gov. Rick Snyder’s testimony Monday in Detroit's historic Chapter 9 case marked a dramatic turn, featuring a sitting governor forced to defend a series of decisions likely to set a national precedent for union protections and pension rights in municipal bankruptcy.
“This is a crisis,” Snyder testified in U.S. Bankruptcy Court during a remarkable three-hour session believed to be the first of its kind for a Michigan governor in the modern era. “It’s still a crisis today. These things have got to get resolved. It’s an unacceptable situation. People are suffering, the 700,000 residents of Detroit.”
True enough, considering the woeful state of the city’s finances, operations and punishing tax burden for those who bother to pay taxes at all. But Snyder’s testimony, delivered in the third day of the eligibility trial of the city’s bankruptcy case, is unlikely to sway hardened positions on either side of the controversial decision allowing Detroit to seek the protection of Chapter 9 bankruptcy.
Emergency Manager Kevyn Orr proposes to engineer a restructuring that would exchange more than $11 billion in obligations to unsecured creditors for a $2 billion note; to exact substantial cuts to the unfunded obligations to city pensions, despite state constitutional protections of vested pension benefits; to replace retiree health-care obligations with a combination of vouchers and ObamaCare; and to restructure city departments.
Repeatedly, the governor replied “I do not recall” in answer to questions probing specific decisions along the path to his decision to approve Orr’s request to file Chapter 9 bankruptcy. A graduate of the University of Michigan Law School, he repeatedly invoked attorney-client privilege to avoid answering questions essentially seeking to establish what he knew and when he knew it.
The governor labeled as “speculation” the prospect that the city’s retirees, including former police officers and firefighters, would have their accrued annual pensions cut, despite the fact that Orr’s June 14 proposal to creditors — the most detailed since Orr took office — specifically says “there must be significant cuts in accrued, vested pension amounts for both active and currently retired persons.”
Snyder disputed repeated suggestions by lawyers for city unions, pension funds and retirees that Orr is an agent of the state of Michigan who is guiding the city’s restructuring and bankruptcy on orders from the governor and senior members of his team. Nor would he say whether the state offered to help cover unfunded pension liabilities for city retirees.
He also said the decision to attach a $5.7 million appropriation to the newest emergency manager law, Public Act 436, was not intended to insulate it from an all-but-certain repeal referendum. The contention is unlikely to sway fierce critics who regard the replacement of the previously repealed emergency manager law to be an end-run around the electorate by Snyder and the Republican-controlled Legislature.
That Snyder agreed to testify at all, however, underscores the critical importance of Detroit’s bankruptcy and the need to keep the case moving ahead during what is expected to be an 18-month stint for Orr. Predictable battles over executive privilege would produce suspicion, charges of stonewalling and bad optics suggesting the governor has something to hide.
He still may, as e-mails produced during his testimony attest. The documents, carefully selected to support the lines of questioning pursued by lawyers for the unions, retirees and pension funds, suggest an administration rethinking and reconsidering the pace and decision-making in the lead-up to a bankruptcy filing on July 18.
In a July 9 e-mail, state Treasurer Andy Dillon signaled flexibility to manage the city’s unfunded pension liabilities, pegged by Orr at $3.5 billion: “Because pensions have such a long life,” Dillon wrote, “there are a lot of creative options we can explore to address how they will be treated in a restructuring.”
In a July 12 e-mail, the governor’s counsel, Mike Gadola, suggested to Snyder’s key advisers that he consider placing conditions on a Chapter 9 bankruptcy petition for anything that could impact pension benefits, general obligation debt and the sale of certain assets over a pre-determined value.
“I favor this approach ... primarily because I think we should exercise the governor’s ability under P.A. 436 to place conditions upon his authorization for a bankruptcy filing,” Gadola wrote six days before the city filed for bankruptcy. He suggested Snyder ask Orr to pursue “a more deliberative approach” to a process that rocketed to bankruptcy the next week.
The governor rejected attaching conditions to the filing. He testified that he concluded the bankruptcy, the largest of its kind in American history, would be further complicated and slowed by conditions likely to hinder efforts to get a so-called “Plan of Adjustment” confirmed in bankruptcy court.
“This is a problem that has been accumulating for 60 years and has not been solved before,” Snyder testified. In a statement released later, he added: “Bankruptcy was the last and only viable option to bring the financial crisis to an end and get the city back on a successful path. My job is to make the tough decisions to resolve the problems we face today, not ignore them.”
Daniel Howes’ column runs Tuesdays, Thursdays and Friday