Detroit — It was all about the method Tuesday in Detroit's historic municipal bankruptcy trial, as attorneys wrangled over specific methods used in calculating cuts to retiree pensions and the value of the city's artwork.

The heart of the testimony turned on a central issue of the bankruptcy: Is the city's plan favoring retirees over bond insurers and other creditors?

Kim Nicholl, an adviser with The Segal Co., testified about her review of the city's plan of adjustment for the committee of city retirees.

Under the plan, current and retired general city workers will take a base cut of 4.5 percent and have cost of living adjustments eliminated. Police and firefighters won't endure cuts to their pensions, but will see their 2.25 percent annual COLA reduced to about 1 percent.

Nicholl came under fire for her support of the interest rates used in the assumptions to create the pension deal. The plan assumes a rate of inflation — 2.5 percent — that is at the low end of widely used figures, including the common 3 percent historical rate of inflation. The city's bankruptcy plan also assumes that the replacement hybrid pension plan will produce an annual investment return of 6.75 percent for retirees.

That rate of return is lower than other plans Nicholl has recently reviewed, which has been as high as 8 percent, noted John Wagner, an attorney representing hedge funds that hold the city's controversial pension bonds known as COPs, or certificates of participation.

"If you're right, then the plan is false," Wagner argued.

The city estimates its current pension shortfall is $3.4 billion. But depending on the interest rates applied, the projected shortfall — and the corresponding cut to retirees and workers in the plans — could end up being smaller in reality, and the pension investments could perform well enough to start returning more money in the future. Those higher returns would constitute money that could have gone to creditors, including the hedge funds holding the pension bonds.

While she supports the current plan — which has been approved by a vote of retirees and pension plan participants — Nicholl made it clear there were parts she didn't like.

Namely, the Chicago-based actuary told U.S. Bankruptcy Judge Steven Rhodes that lawyers she's worked with believe there's "no legal basis" for the city's plan to "claw back" excess interest that was paid into annuity savings fund accounts of some General Retirement System retirees during a 10-year period. Retirees will have to repay that money by taking reduced pension payments that can total thousands of dollars for some of them.

Nicholl told the judge that those subjected to the recoupment are "victims of it."

"They weren't controlling the interest rate," she said. "Having to pay that back now, at this stage, is a little bit like pulling the rug out from under them."

Earlier Tuesday, Alan Perry, a principal with actuarial firm Milliman, testified for the city about investment return assumptions and the city's pension fund.

On Monday, Perry said the 6.75 percent assumption included in Detroit's debt-cutting plan is one of the lowest rates used by municipalities nationwide.

But while testifying Tuesday, Perry agreed with an assertion by Rhodes that given the city's insolvency, the investment rate assumptions laid out in the plan for Detroit's pension funds may be too high.

The same question — whether the city is being unfair to bondholders with its "grand bargain" to hang onto the DIA artwork — also came up in court Tuesday.

Vanessa Fusco of Christie's auction house testified for the city how the auction house determined that city-purchased Detroit Institute of Arts masterworks could be worth between $454 million to $857 million.

However, about 1,000 of the works were appraised as having little or no commercial value, Fusco added.

Ed Soto, an attorney for a holdout creditor — bond insurer Financial Guaranty Insurance Co. — established on cross-examination that the appraisal was limited only to artworks purchased with some or all city money, rather than all the works held by the DIA. Soto attempted to impugn the appraisal and suggest the city may have influenced the outcome in its favor, but made no direct accusations.

Testimony is scheduled to continue Wednesday. The first witness is retiree committee adviser Ron Bloom, a former Obama auto task force member.

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