Detroit Banker Buckfire Says Cuts to Bonds, Pensions FairSteven Church
Detroit’s proposal to cut payments to bondholders and pensioners by the same amount is fair and differs from previous attempts by distressed cities to restructure, investment banker Kenneth Buckfire told the judge overseeing the city’s record-breaking bankruptcy.
Buckfire was the third of five witnesses the city said it will present at a federal trial to decide whether Detroit can remain under court protection. 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.
“It was fair because it treated our unsecured creditors exactly the same,” Buckfire said today in U.S. Bankruptcy Court in Detroit. He was responding to a question from an attorney for retirees challenging a proposal to subject pensioners to the same cuts as unsecured bondholders.
Other cities “have tended to treat one group of creditors more favorably than others,” Buckfire said. “We decided the city should be impartial in terms of how we would treat creditors.”
In opening statements Oct. 23, 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. The city called Buckfire and two other financial consultants as witnesses to help prove that it belongs in bankruptcy.
The trial will continue Oct. 28 when Governor Rick Snyder is scheduled to testify. 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.
Federal bankruptcy law requires the city to 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.
After Buckfire testified, Police Chief James Craig and Orr took the stand. Orr began his testimony describing his career history as bankruptcy lawyer at Jones Day LP, and as a political appointee during President Bill Clinton’s administration, where he served with the Justice Department and the Resolution Trust Corp.
Orr was a senior member of the Jones Day firm when he was asked by state officials to be the city’s emergency manager. Orr initially resisted the idea, but eventually agreed, he said.
Later his former law firm was hired as the city’s bankruptcy counsel. He said there was no connection between his hiring as the emergency manager and Jones Day’s appointment.
Craig told U.S. Bankruptcy Judge Steven Rhodes that the city solves about 11 percent of homicides. The city had about 384 homicides in 2012, making it the second-most violent city in the U.S., according to FBI statistics.
In describing the department, Craig cited a consultant’s report that concluded: “Everything is broken. Deplorable conditions. Crime is extremely high. Moral is low. Absence of leadership.”
Craig, who receives a pension after retiring from his job as Los Angeles police officer, said he was concerned that cutting pensions in Detroit would make it hard to retain police officers.
Yesterday, Buckfire, the co-president of Stifel Financial Corp.’s Miller Buckfire & Co., said that a 2009 deal with swaps investors threatened the city’s best source of cash in the months before it filed the biggest municipal bankruptcy.
That deal gave the swaps investors power to lock up much of the $180 million a year that Detroit gets from taxes on its casinos, Buckfire testified yesterday. That put added pressure on the city, which had only a $7 million cushion on a budget of more than $1 billion, he said.
Buckfire also testified that bondholders demanded full repayment during negotiations designed to avert a bankruptcy, relying on an assumption that general obligation bonds were safe because any municipality that issued them was required to raise taxes to repay the debt.
In its June proposal to creditors, the city didn’t accept the claims by either pension creditors or general obligation bondholders that each had a special status under Michigan law and should be paid in full, Buckfire said in court.
Under that restructuring proposal, made before the city filed bankruptcy in July, Orr said he would pay all unsecured debt holders, including retirees and general obligation bondholders, pennies on the dollar.
Buckfire was questioned by lawyers for unions and retirees trying to get the bankruptcy case thrown out. Buckfire, who grew up in the suburbs outside Detroit, said he has led the city’s financial restructuring team since January.
He has followed Detroit’s financial troubles since it was downgraded by bond-rating firms in 2009, he said. Last year, the state hired him to do a 60-day review of Detroit’s finances. The city later agreed to hire Miller Buckfire after the state required local officials to bring on a financial adviser as a requirement to get more aid.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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