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Dillon: Steep Haircuts Demonstrated Detroit Bankruptcy Needed

CHICAGO -- Former Michigan Treasurer Andy Dillon said Tuesday that he became convinced bankruptcy was inevitable for Detroit when he saw the city’s proposal for unsecured creditors.

Dillon, who stepped down as treasurer last week, said he first saw emergency manager Kevyn Orr’s 10-year restructuring plan on June 14, when Orr unveiled it to creditors.

Orr’s proposal called for haircuts of up to 90% for unsecured creditors, which included pensioners and bondholders.

“The recovery for unsecured creditors, I didn’t know how anyone could practicably cut a deal and walk out of the settlement room,” Dillon said. “I became very skeptical that an out-of-court settlement could be reached.”

Dillon’s testimony came on the seventh day of the trial to determine whether Detroit is eligible to enter into bankruptcy protection.

Creditors called Dillon in an effort to prove that the state and city did not negotiate in good faith with creditors prior to the filing, a prerequisite for entering into Chapter 9.

Earlier Tuesday, United Auto Workers General Counsel Michael Nicholson testified that the city failed to negotiate in good faith with the UAW.

He said attendees at the June 14 meeting were not allowed to respond to Orr’s presentation and had to submit written questions.

“Have you ever participated in negotiations in which one side was not allowed to speak freely?” UAW attorney Peter DeChiara asked.

“I have never, never been involved with a negotiation when only one side speaks,” Nicholson said. 

Dillon also said a state bailout of the city was unlikely, as it would have been illegal for Michigan to give money to Detroit without legislative consent.

“If I lent money to local governments I would violate my oath to uphold the Michigan constitution,” Dillon said. “I don’t ever see a situation where the state Legislature would appropriate money to shore up liabilities to the city,” he said.

Dillon added that he didn’t recall if Orr ever asked the state for money to address the city’s unfunded pension liability.

Dillon was a key architect of the Motor City’s historic July 18 bankruptcy filing, the largest municipal bankruptcy to date. He was heavily involved with Detroit’s finances from the time he became treasurer in January 2011, helped craft a consent agreement with the city in April 2012, and was a member of the review team that recommended Gov. Rick Snyder declare the city’s second financial emergency in late 2012.

Creditor attorneys are trying to show that Orr and state officials filed for bankruptcy without engaging in sincere negotiations because they believed they needed to cut pensions, which they could only do with the support of federal bankruptcy law.

Attorneys showed Dillon an email from Orr that said cuts to pensions were necessary to restructure the city, and that only federal bankruptcy would allow for the cuts. Dillon said he did not recall receiving advice on that topic before the filing. 

Dillon also said the size of Detroit’s unfunded retiree health care liability was more of a problem than the city’s pension liability. The size of the unfunded pension liability has been topic of hot debate between the city and its creditors, with Orr estimating it at $3.5 billion and the pension systems at $644 million.

But Dillon said it was the city’s other post-employment benefits liability, projected to total $5.7 billion, that posed a major challenge.

“[The pension liability] was relevant but not a driving factor for whether or not 9 was necessary,” said Dillon. “From Day 1 it was the unfunded health care liability that was the challenge for the city.”

Creditor attorneys presented an email in which Dillon warned the city’s bankruptcy filing looked premeditated.

“I don’t think we are making a case why we are giving up so soon to reach an out-of-court settlement,” the treasurer wrote. “Looks premeditated. I think we need to say facts got worse as we dug into the numbers and I believe there is a state court option to get retirees into a class (we don’t acknowledge that) and why is that unpractical. We don’t even say they rejected the city’s proposal. I think we may want a ‘take it or leave it’ demand before we pull this trigger. I agree with the recommendation [to file for bankruptcy] but I don’t think we made the case.”

Also Tuesday, Judge Steven Rhodes denied the city’s request to delay by two weeks a hearing on whether to block Orr’s proposed cuts to the city’s health care benefits.

Orr last month announced major cuts to active and retiree health care plans, including shifting those not covered by Medicare to the insurance exchange under the new federal health care law, and dropping current city contributions in favor of a $125 to $200 a month stipend. Detroit attorneys announced Tuesday morning the city would delay the changes until Jan. 31 due to problems surrounding the implementation of the Affordable Care Act.

A committee representing the city’s 23,000 retirees sued to block the changes, and Rhodes will decide whether to block the city from implementing the changes.

The city Tuesday asked Rhodes to push back by two weeks a hearing on the lawsuit, but the judge refused.

“There is, I think it’s fair to say, enough confusion created by the rollout of the Affordable Care Act at this point in time that to add to it or compound it in the way the city proposes here is really not necessary and not fair to the retirees,” the judge said.

The health care hearing is expected to come at the end of the eligibility trial, either Friday or next week.

The trial will continue Thursday with Dillon back on the stand. Top Snyder aide Richard Baird is also expected to testify. Closing arguments could come as early as Thursday or Friday.




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