Dillon, shadowy Snyder aide wrap testimony at Detroit bankruptcy trial

Former state Treasurer Andy Dillon and Gov. Rick Snyder’s confidant Rich Baird were two of the final witnesses who testified Thursday in the Detroit bankruptcy trial, which continues at 9 a.m. Friday with closing arguments.

Unions, retirees and pension funds will get one last chance to convince U.S. Bankruptcy Judge Steven Rhodes that the bankruptcy is unconstitutional and that Emergency Manager Kevyn Orr failed to negotiate in good faith with creditors.

Rhodes is not expected to immediately decide whether Detroit is eligible for Chapter 9 bankruptcy relief.

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U.S. Bankruptcy Judge Steven Rhodes will hear closing arguments in the Detroit bankruptcy trial at 9 a.m. Friday.

The city’s bankruptcy team needs about 90 minutes while a group of unions, pension funds and retirees need about three hours.

The trial has lasted eight days and featured testimony from Gov. Rick Snyder, Emergency Manager Kevyn Orr, former state Treasurer Andy Dillon and an army of consultants hired by the city.

The trial will determine whether Detroit is eligible for Chapter 9 bankruptcy relief. If so, the city will file a plan by the end of the year to adjust about $18 billion in debt.

Joe Turner, attorney for the Detroit Police and Fire Pension board, talks with Mark Diaz, right, president of the Detroit Police Officers Association union, in the hallway outside the City of Detroit Labor Relations Office after meeting with Detroit Emergency Manager Kevyn Orr’s team to discuss pensions on July 11.

Officers are concerned about the impact pension and benefit cuts will have on their personal lives if Detroit is eligible for bankruptcy relief, the police union president testified today.

Mark Diaz, president of the Detroit Police Officers Association, testified as the last witness in an eight-day trial that will determine whether Detroit is granted Chapter 9 bankruptcy relief.

He tried to humanize the impact of cuts and describe his experience as a trustee on the Detroit Police and Fire pension board, which has objected to the city’s bankruptcy petition.

Officers are worried about the fate of their pensions, which face likely cuts in bankruptcy court, Diaz testified.

Injured and disabled officers receive a portion of their base pay. The money comes from the Police and Fire pension fund, Diaz testified.

“Are pensions and disability of significant concern?” asked Barbara Patek, an attorney for police and firefighter unions.
“Yes,” Diaz said.

A financial adviser working for Detroit’s pension funds admitted he stayed silent and did not offer any feedback on Emergency Manager Kevyn Orr’s June 14 proposal to restructure Detroit’s finances — and avoid bankruptcy.

Under cross examination from the city’s bankruptcy lawyer, financial adviser Bradley Robins said he was mum after hearing how Orr proposed restructuring $18 billion in debt.

Thomas Cullen

A lengthy exchange appeared designed to combat Robins’ earlier testimony that Orr failed to negotiate in good faith with creditors. City bankruptcy lawyer Thomas Cullen tried to illustrate that creditors failed to negotiate or float counter proposals.

“Did you offer any ideas?” Cullen asked.

“No,” Robins said.

“Did you discuss it?” Cullen asked.

“No,” Robins said.

“You just listened?” the lawyer asked.

“I just listened,” Robins said.

“Did you take issue with the rationale?” Cullen asked.

“I did not,” the adviser said.

“You understood what was being discussed?” the lawyer asked.

“I did,” Robins said.

“You understood the city was conveying that it wanted to work cooperatively with creditors?” Cullen asked.

“Yes,” the adviser said.

“And it wanted you to engage in a discussion…so progress could be made?” Cullen asked.

“I don’t know,” Robins said, “I would be speculating. It was more a presentation. It was not a back-and-forth discussion.”

“Did you have authority to negotiate the diminution of vested pension rights?” the lawyer asked.

“No,” Robins said. “There was no specific proposal for me to take back to them.”

Bradley Robins

A financial advisor hired by Detroit’s pension funds said there were no negotiations between Emergency Manager Kevyn Orr’s team and the retirement system ahead of the city’s July 18 bankruptcy filing.

The pension funds are trying to kick Detroit out of bankruptcy court and have argued the city is ineligible for Chapter 9 relief because Orr failed to negotiate in good faith.

Financial advisor Bradley Robins addressed that argument today while testifying for the city’s pension funds.

“In your judgment, did any negotiations take place between the city and the retirement system prior to the Chapter 9 filing?” pension fund lawyer Ron King asked.

“No,” Robins said.

The city’s pension funds face likely cuts if Detroit is eligible for bankruptcy relief. Orr estimates the pension funds have a $3.5 billion shortfall.

Both pension funds are challenging the city’s eligibility to receive Chapter 9 bankruptcy relief and contend Orr has inflated their level of underfunding by $2 billion as a way to extract deep cuts from the 23,500 pensioners.

Robins criticized Orr’s restructuring proposal shared with creditors June 14.

In the proposal, Orr proposed that unsecured bonds and other debt, including the city’s two pension funds, would divide $2 billion in “non-recourse participation notes” payable once the city’s financial condition improves.

Ron King

“I viewed that more as a shot across the bow,” Robins said. “The note, itself, I thought was not a serious proposal.”

“Why did you not think it was a serious proposal?” the lawyer asked.

There was no maturity date, he said, and no obligation for Detroit to share proceeds from any asset sales.

“Or any incentive for the city to pursue any of that,” Robins said.

“Did you take that as a serious proposal for creditors?” King asked.

“No,” Robins said. “I took it as the city putting creditors on notice that it wanted to begin the process of having discussions about having a restructuring.”

“Do you believe the 35 days between the June 14 proposal and July 18 was a reasonable period of time for your team to evaluate date and perform the analysis you deemed appropriate and come up with a proposal for the city’s consideration?” King asked.
“No,” Robins said.

Sharon Levine, a lawyer for AFSCME, the city’s biggest union tried to undercut the city’s argument that negotiations were impractical due to the large number of creditors.

Given more time, Levine asked if it was possible to negotiate a deal.

Yes, Robins said.

William Wertheimer outside federal court.

William Wertheimer outside federal court.

Rich Baird, a key adviser to Gov. Rick Snyder, had a contentious start to his testimony today while being questioned by a lawyer for Detroit retirees and current workers.

Baird bridled at being called Snyder’s “right-hand man” by attorney William Wertheimer, who is trying to kick Detroit out of bankruptcy court. His early testimony — and rare public comments — focused on his role recruiting Emergency Manager Kevyn Orr in January and his involvement in choosing Orr’s former law firm Jones Day to restructure the city’s finances.

Baird is the governor’s “transformation manager” who until recently was being paid through Snyder’s nonprofit NERD Fund.

“I was never a representative of the state,” Baird said.

“Who did you hold yourself out as?” Wertheimer asked.

“An independent consultant to the governor and his team involved in talent sourcing,” Baird said.

“But you were working for the governor,” Wertheimer said.

Gov. Rick Snyder

Gov. Rick Snyder

“I was working with the governor,” Baird said.

“If you were working for anybody, it would have been the governor,” Wertheimer said.

“I was working for the NERD Fund,” Baird said.

“Which was set up by the governor,” the lawyer said.

“No,” Baird said.

Wertheimer shifted to Baird’s role in hiring Jones Day.

“You pushed for Jones Day to be hired, didn’t you?” Wertheimer asked.

“Define pushed,” Baird said.

“You spoke in their favor, talked to people, suggested Jones Day would be a good choice, something like that?” the lawyer asked.

Kevyn Orr

Kevyn Orr

At the time, Jones Day was in the running along with four other firms.

“I said any of those five firms would be a good choice,” Baird said.

“Did you tell Orr you were also going to be pulling for Jones Day?” Wertheimer asked.

“I believe I did,” Baird said.

“And you told him  that was because you were going to be pulling for Jones Day,” Wertheimer said.

“I believed they were going to be successful,” Baird said.

“It’s like a wish,” the lawyer said.

“It’s like a hope,” Baird said.

“You’re the governor’s right-hand man,” Wertheimer said.

“There is nothing in my job description or agreement that puts that label on me, sir,” Baird said.

Rich Baird

Rich Baird, a key aide to Gov. Rick Snyder, took the witness stand in the Detroit bankruptcy trial and is expected to face questions about his role in hiring Emergency Manager Kevyn Orr and involvement in the city’s bankruptcy case.

Baird, the governor’s “transformation manager,” was questioned during a deposition last month about the fate of retiree pensions:

Baird’s testimony also suggests there was little discussion within the administration about how to deal with Detroit’s pension liability, an issue that looms large over the largest municipal bankruptcy filing in U.S. history.

But Baird said he independently was gathering data on the pension payouts to study whether the state could pursue legislation “that would provide (an) incremental safety net to those at the lower end of the spectrum.”

“That was not based on discussions with anybody else,” Baird testified. “It was simply a question that I had because I didn’t know the answer.”

Last month, The Detroit News first reported that Baird, a retired PricewaterhouseCoopers executive, had been transferred to the state payroll at a $140,000 salary.

Andy Dillon

It is “unfortunate” that Detroit police officers are underpaid, said former state Treasurer Andy Dillon, who stopped short of calling them undermanned in the bankrupt city.

“That’s a tougher question,” Dillon said while being questioned about his involvement in trying to help Detroit restructure its finances. “A lot of the information we had is that two-thirds of officers work behind a desk instead of on the street. I’m not sure if that is a lack of personnel or if they could be better utilized.”

Earlier, he said it is “unfortunate the city didn’t have the resources to pay more,” to officers and firefighters.

Detroit police officers and firefighters could face a rougher fate if the city is eligible for bankruptcy relief. They do not receive Social Security benefits and retirees could face pension cuts if Detroit is eligible for Chapter 9 bankruptcy relief.

Andy Dillon

Former state Treasurer Andy Dillon triggered a second wave of laughter during the Detroit bankruptcy trial today when he told a courtroom full of high-priced lawyers that consultants can be “very expensive.”

Dillon was being questioned by Lynn Brimer, an attorney for retired Detroit police officers, about costs associated with the state overseeing a consent agreement that tried to restructure the city’s finances last year.

Staring out at a courtroom filled with lawyers, including some that are charging up to $1,000 an hour to work on Detroit’s bankruptcy case, Dillon was asked about consultants hired to work on restructuring the city’s finances.

“Consultants can be very expensive,” Dillon said, drawing smiles and laughter from the courtroom gallery.

Andy Dillon

Former state Treasurer Andy Dillon correctly anticipated a flurry of lawsuits after Emergency Manager Kevyn Orr’s appointment in March.

Dillon was shown a copy of Dillon’s email sent to colleagues in March that warned about the likelihood of several lawsuits being filed against the state and city.

Attorney Jennifer Green, who represents the city’s pension funds, asked him about the email, which drew a long pause and laughter from Dillon.

“We get sued all the time,” he said, noting dozens of lawsuits filed by residents and groups over emergency manager appointments in Detroit and other cities.

“All kinds of theories were surfacing — literally there were about 100 lawsuits,” Dillon testified.

Moody’s Investor Service issued a report Wednesday raising questions about Detroit’s “unprecedented” pursuit of $350 million of debtor-in-possession financing while the city is in bankruptcy.

Emergency Manager Kevyn Orr has asked U.S. Bankruptcy Judge Steven Rhodes to approved a $350 million loan offer from Barclay’s to finance a $230 million termination payment of a troubled interest rate swap deal tied to $1.44 billion the city borrowed in 2005-2006 to prop up its pension funds.

From the report:

“DIP financings are commonly used in the corporate sector to inject liquidity into a bankrupt entity, with the objective of paving the way for eventual recovery. In the municipal sector, however, DIP financings are unprecedented. Detroit is likely the first local government to propose this type of post-petition financing structure as it continues to navigate the Chapter 9 bankruptcy process, while balancing the competing interests of operating an insolvent city and negotiating with a variety of creditors.”

Orr wants to use the remaining $120 million to invest in blight removal, public safety and upgrading the city’s outdated technology and computer systems.

Moody’s said because of the unprecedented nature of the short-term borrowing, “it’s too early to assess the impact of the proposal on the city’s finances and existing bondholders.”

In the case of a default, Orr has pledged $4 million in monthly income taxes as a “super-priority lien” and the proceeds of the sale of unnamed city assets exceeding $10 million.

The Moody’s report questioned the feasibility of pledging assets because they “are either tied to core operating functions, difficult to value, or some combination of the two, underscoring that a municipality is a going concern and has only limited options to turn to asset liquidation in bankruptcy as compared to a corporation.”

“The impact of the proposal on the city’s existing creditors, as well the city’s near-term financial position and long-term financial recovery, are difficult to assess at this point given the number of contingencies that remain,” Genevieve Nolan, a Moody’s assistant vice president, said Wednesday in a statement.

Detroit Department of Public Lighting employee Olen McKenzie installs new LED lights on Oldtown Road. (David Coates / The Detroit News)

In case you missed it, here is a recap of some late-breaking news Wednesday involving a creditor’s opposition to Detroit’s plan to spend at least $23.5 million annually repairing the city’s broken streetlight system.

From the story:

The objection marks the first time one of the city’s major creditors has sought to use the bankruptcy court to block Emergency Manager Kevyn Orr’s plans to redirect $1.25 billion in city tax revenue from debts and liabilities to improving city services.

Robert Snell
Robert Snell is the Detroit News federal courts reporter. He can be reached at rsnell@detnews.com or (313) 222-2028.