CHICAGO — Detroit entered the second week of the confirmation trial for its bankruptcy exit plan Monday, calling witnesses who testified to the city's desperate need for the $1.5 billion of capital investments featured in the plan.
Restructuring expert Charles Moore, from Conway MacKenzie, spent nearly two days on the stand outlining the city's grim problems and arguing that the money is necessary to boost services to even an adequate level.
"It's unclear to me how the reinvestment initiatives could be funded," without the money in the plan, Moore told U.S. Bankruptcy Judge Steven Rhodes, who is overseeing the trial.
Moore, who also testified at Stockton, Calif.'s bankruptcy trial, is the Detroit's second witness, following Friday testimony from its chief financial officer, John Hill. Detroit has said it plans to call up to 26 witnesses, including Detroit Emergency Manager Kevyn Orr, to defend the plan, which could take through the first week of October.
Syncora Guarantee Inc. and Financial Guaranty Insurance Co., the creditors leading the opposition, will begin to present their evidence attacking the plan after that.
The parties could still reach a settlement.
Rhodes is charged with deciding whether the confirmation plan passes the Chapter 9 tests of being fair to creditors and feasible.
Moore played a key role in crafting the city's plan of adjustment and was involved with a pension task force that reviewed the city's two pension funds.
Conway MacKenzie's contract with Detroit is set to expire on Sept. 30, but an extension is possible, Moore said Monday.
After his testimony, Rhodes asked Moore a series of direct questions on various topics, including Moore's opinion on a "tolerable" unfunded pension liability size for the city post-bankruptcy — Moore said there was debate on the matter -- and what measures are in place to ensure the $1.5 billion is not lost in fraud or abuse. Moore said there will be "significantly more management rights" in the city's new labor contracts and that Mayor Mike Duggan is requiring all departments to justify all their spending requests.
Moore also testified about the city's controversial history of outsized annuity fund payments to retirees. The city wants the annuity fund to give more than $200 million back to the pension systems. Moore said general employee pension cuts would have been 13.3% if the city does not succeed in clawing back the payments.
Beth Niblock, the city's chief information officer, testified after Moore, recounting the abysmal state of the city's technology. The city badly needs to spend the roughly $80 million on IT included in the confirmation plan, Niblock said. "It is fundamentally broken or beyond fundamentally broken. In some cases, fundamentally broken would be good," she said.
Monday's final witness was Caroline Sallee, a tax analysis specialist at Ernst & Young who testified about the revenue projections built into the confirmation plan.
Under questioning from the city, Sallee testified that the plan's 10-year tax collection forecasts are reasonable, a key hurdle to passing Rhodes' feasibility test. She said that Detroit will likely continue to loss population over the next 10 years. Like other witnesses, she noted that the city collects only 50% of its residential property taxes, a figure the city hopes to boost to 70% in the next several years.
The city is in the midst of a major reassessment of all its property, an effort that will likely lead to a 15% drop in taxable value within the next few years and much deeper when it's over in three to five years. Property values have fallen 63% since 2007, she said.
Syncora attorney Douglas Smith began his cross examination of Sallee late Monday, seeking to discredit her expertise on a variety of fronts. His questioning will continue Tuesday.
The city is expected to call next Police Chief James Craig and Fire Commissioner Edsel Jenkins as soon as Tuesday.