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Detroit Emergency Manager Spars With Bankruptcy Judge

Nov. 4 (Bloomberg) -- Detroit’s emergency manager concluded his testimony in a federal court by defending his decision to put the city into bankruptcy instead of trying to persuade unions to negotiate cuts to pensions and other benefits.

Kevyn Orr denied that he was trying to “mislead anyone” at a public meeting in June when he told a retiree that municipal pensions were “sacrosanct” under Michigan law. Orr has since argued that federal bankruptcy law allows him to cut pensions even though a clause in the state constitution bars such reductions.

U.S. Bankruptcy Judge Steven Rhodes asked Orr what he would tell the retiree today.

“I would say his rights are subject to the supremacy clause of the U.S. Constitution,” Orr said.

“That is a bit different from sacrosanct, isn’t it?” Rhodes asked.

Orr said it wasn’t different because he also told people at the meeting that all creditors of the city, including employees and retirees, must be prepared to accept cuts.

Unions and retiree groups are trying to show that Orr and state officials, including Republican Governor Rick Snyder, acted in bad faith in filing the case under Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities.

Court Protection

Rhodes must decide whether Detroit is eligible to remain in bankruptcy court, where it’s protected from lawsuits and other legal actions that might disrupt reorganization efforts.

The city must show that it’s insolvent, that it’s entitled under state law to file for bankruptcy, that it tried to negotiate with creditors or was unable to do so, and that it intends to file a plan to adjust its debts.

Orr testified that the bankruptcy was necessary partly because the unions refused to negotiate with him over possible cuts to retiree pension and health-insurance benefits.

To persuade Rhodes to dismiss the case, union and retiree lawyers put on three witnesses today to bolster their allegation that Orr never tried to negotiate and to undercut his claims that talks with former workers were impractical.

Lawyers for the unions and retirees claim state officials have been pushing for a bankruptcy as way to cut pensions that are otherwise protected by the Michigan constitution.

AFSCME Director

Steven Kreisberg, national director of collective bargaining for the American Federation of State, County and Municipal Employees, said the union agreed to salary cuts in 2012 only to have state officials block the proposed settlement.

Donald Taylor, a former Detroit police officer and now the head of an association of retired police and firefighters, testified that Orr and then-State Treasurer Andy Dillon told him pensions were protected by the Michigan constitution.

The city could have negotiated with the association and submitted any proposed agreement to members for final approval, Taylor said.

Geoff Irwin, a lawyer for the city, said Taylor’s association and another organization didn’t have authority to sign a deal that would bind all retirees, and the city would have been forced to negotiate with each former worker individually.

The first witness called by the unions and retirees was Shirley Lightsey, a former city worker who leads one of Detroit’s retiree associations.

Under questioning by an attorney for the city, Lightsey acknowledged that she didn’t have authority to negotiate cuts to retiree benefits that would be binding on members of her organization, the Detroit Retired City Employees Association.

“I’ve never had the authority to do binding and I’ve never asked the membership for authority,” Lightsey said.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Steven Church in U.S. Bankruptcy Court in Detroit at schurch3@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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