Detroit Elected Officials Didn’t Cut Costs, Analyst Says

Detroit’s elected officials failed to propose any significant cost savings before an emergency manager was appointed in March, a financial analyst said in a trial to determine whether the city can remain under court protection from creditors.

Gaurav Malhotra, a partner at Ernst & Young LLP who had advised the city since May 2011, was asked today by an attorney for Detroit union workers about savings contained in a restructuring plan developed before the state takeover. The lawyer, Jack Sherwood, sought to challenge the need for the city’s $18 billion bankruptcy filing.

Malhotra said he couldn’t remember any cost savings achieved by Detroit’s elected officials “that were of significance.” Selling property to raise money and reduce debt wouldn’t stop the city’s long-term overspending, he said.

Malhotra, who began testifying yesterday, was the first of five witnesses the city said it will present at the trial in U.S. Bankruptcy Court in Detroit. Lawyers for retired and current city workers have attacked the decision by state-appointed emergency manager Kevyn Orr to put Detroit into bankruptcy, where creditors can’t try to seize assets or file suits that disrupt reorganization efforts.

Detroit will need to spend about $1.25 billion over 10 years to restructure operations, invest in decaying infrastructure and remove blight, a consultant told U.S. Bankruptcy Judge Steven Rhodes today.

‘Severely Broken’

Charles M. Moore, who analyzed the city’s operations, testified that he discovered during his review that “a number of departments were severely broken.” The spending estimate includes $250 million to fix operations for a decade and $500 million for blight removal over six years, Moore said.

In the months before Detroit filed for bankruptcy, it tried to avoid running out of money for basic services by moving cash around, canceling payments to pension funds and defaulting on debt, Malhotra testified yesterday.

The actions were designed “to ensure that the city did not have a payless payday,” Malhotra said. Without a change, the city would build up a $3.9 billion deficit over 10 years, mainly because of the cost of providing pension and health-care benefits to retirees, he said.

In opening statements yesterday, lawyers for the retirees and city workers said Detroit hasn’t met the standard set out in Chapter 9 of the U.S. Bankruptcy Code to remain under court protection.

Law’s Requirements

The law says 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 was never serious about trying to fix the city’s finances outside of bankruptcy, said Jennifer K. Green, an attorney for a city pension system fighting the Chapter 9 case.

State officials conspired with Jones Day, the law firm where Orr was a partner, to create a new emergency manager law and use it to file for bankruptcy, giving Detroit leverage over unions and retirees, she said.

“It really was a foregone conclusion,” Green said.

Detroit has a “mountain of evidence” showing it’s entitled to federal bankruptcy protection, Bruce Bennett of Jones Day, a lawyer for the city, said at the beginning of the trial, which is scheduled to last through Oct. 29. Detroit is “failing to provide basic services,” he said.

Not Negotiations

Orr told unions that the talks the city was holding with them weren’t negotiations, said Sharon Levine of Lowenstein Sandler PC. She and Sherwood are representing the American Federation of State, County and Municipal Employees.

Bennett said Orr was trying to avoid having the talks come into conflict with labor laws. For bankruptcy purposes, the city’s meetings with creditors were a good-faith effort to negotiate with creditors, Bennett said.

That distinction was lost on the audience of union officials, who believed it meant the city was not open to their opinions, Levine said. Detroit was simply presenting its plan, not trying to solicit a counter-proposal, she said.

“It was basically a classroom-type instruction, period,” Levine said.

The city filed the biggest U.S. municipal bankruptcy in July saying it didn’t have the money to pay its bondholders, retirees and employees everything it owes them while still providing basic services to citizens.

Unions, retirees and the city’s pension system claim Michigan’s constitution prevents Detroit from cutting pensions.

Snyder Testimony

Governor Rick Snyder, who testified under oath in a videotaped deposition this month, is prepared to testify in court Monday, said Matthew Schneider, a lawyer with the state. Snyder, a Republican, is being called as a witness by the United Auto Workers, which represents some city workers and is trying to show that the bankruptcy filing wasn’t in good faith.

Rhodes extended Monday’s hearing to 5 p.m. from 3 p.m. to allow Snyder to finish his testimony in one day. Snyder is scheduled to take the stand at 1 p.m.

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

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