CHICAGO -- Bond insurers wrapping Detroit’s debt fought the city’s restructuring proposal ahead of its historic July bankruptcy filing in part because they did not want to set a precedent for other cities, Detroit’s investment banker said Thursday.
“They made it very clear to me they were not willing to consider any impairment of general obligation bonds,” Ken Buckfire, from Miller Buckfire, said Thursday in his testimony during the second day of a trial to determine whether Detroit is legally eligible for bankruptcy protection.
Buckfire testified as a witness for the city, providing grim details of Detroit’s fiscal descent from the time his firm was hired in the spring of 2012 to the city’s Chapter 9 filing on July 18.
None of the city’s creditors, secured or unsecured, were happy with the restructuring plan unveiled by emergency manager Kevyn Orr on June 14, Buckfire said. The proposal treats the city’s unlimited-tax general obligation bondholders, as well as its pensioners, as unsecured, offering roughly a dime on the dollar in repayment.
“Speaking with bondholders, nobody was willing to consider any compromise of their claims, whatsoever,” Buckfire said.
Holders of the city’s water and sewer bonds also pushed back against Orr’s restructuring plan. The city has nearly $6 billion of water and sewer bonds, which are considered among its most secured debt. Orr wants to spin off the department into a new regional authority and refinance the debt.
“Even they didn’t like the proposal,” Buckfire said. “Even though we would give them 100-cent recovery, it would not have been at the old interest rates, which were double the costs,” he said. “They didn’t like it. I was not surprised, but I hoped at least they would counter with something else.”
Buckfire’s comments are part of Detroit’s effort to prove that it negotiated with its creditors in good faith, one of the tests for being eligible to enter into bankruptcy.
Insolvency is another test, and Buckfire testified that the city’s cash position was on a “razor’s edge” by the spring of 2013. By May, if the city had made all the payments owed, it would have ended June with only $7 million in cash, he said.
Detroit’s fear of losing access to crucial casino revenue -- its only stable revenue source, according to Buckfire -- was a main driver behind the decision to file for Chapter 9, he said.
The casino revenue, about $180 million a year, acts as collateral on the city’s interest-rate swaps, and Buckfire testified that default was possible.
“I was very concerned about the default threat that, at any time, the swap parties could block the city’s access to gaming revenues which was, and still is, the highest quality revenue the city has,” Buckfire said. “In January, that was our primary concern ... The swap banks could deprive us of access to the casino revenue and cause the city incredible damage, and we would have had to make massive cutbacks to services.”
Creditor attorneys will cross-examine Buckfire Friday.
Earlier Thursday, Charles Moore, a restructuring specialist from Conway MacKenzie, weighed in on one of the more controversial aspects of the city’s fiscal picture: the size of its unfunded pension liability. Orr, backed by a report from actuarial firm Milliman, contends the city’s two pension systems together have a $3.5 billion liability. The pension systems and unions say that figure is vastly inflated.
Union attorneys have pushed to not allow the city’s estimate to be introduced. U.S. Bankruptcy Judge Steven Rhodes on Thursday said he would allow Moore to testify about the $3.5 billion figure, but only as it relates to Orr’s efforts to negotiate in good faith, not as the true or final liability. The judge made the same decision about the forecasting documents that project the city’s revenue growth.
Moore testified that after years of cuts, many city departments were “severely broken, unable to perform basic functions” such as sending out property tax bills. He said it would cost the city $500 million over the next six years to demolish blighted buildings and improve vacant properties and $250 million to fix city operations over the next 10 years. The figures come from Orr’s June restructuring proposal, which Moore played a key role in crafting.
Detroit emergency manager Kevyn Orr and Police Chief James Craig are expected to testify Friday or Monday, depending on the speed of the case. Union and retiree attorneys will call Gov. Rick Snyder and other top state officials to testify when the city rests. The trial will last at least through next week, and Rhodes has set aside additional days in early November if needed.