Mich. gov calls bankruptcy right decision for Detroit

Nathan Bomey, Matt Helms and Alisa Priddle | Detroit Free Press

DETROIT — Michigan's governor knew he had the power to make Detroit's bankruptcy filing contingent on protecting pensions but chose not to exercise that power.

That's one of the admissions Gov. Rick Snyder made in federal court Monday as lawyers grilled him on why he authorized the bankruptcy filing — the largest municipal bankruptcy filing in U.S. history — and whether he took any steps to make sure the pensions of city workers would not be hurt. Snyder's appearance on the witness stand is a first for a Michigan governor still in office.

The governor dodged several questions, citing either attorney-client privilege or saying he didn't recall certain events.

One lawyer asked him point blank whether he and Detroit emergency manager Kevyn Orr ever discussed filing bankruptcy as a way to cut the pension liabilities. Snyder didn't answer, citing attorney-client privilege. Orr is a partner with Jones Day law firm whom Snyder hired to restructure the city's finances.

The same lawyer asked him whether Orr ever asked the state if it would share in financial burden of Detroit's pension liabilities.

"I don't recall," Snyder said.

Snyder testified Monday in Detroit's bankruptcy trial that the prospect of retiree pension cuts is a question that the judicial system should decide.

It was a historic moment for the state and a defining moment for the first-term Republican — a Battle Creek, Mich., native; University of Michigan graduate; and former Ann Arbor, Mich., investor now called to defend his decision to take over the city of Detroit.

William Wertheimer, a lawyer for plaintiffs who filed a lawsuit seeking to overturn Michigan's emergency manager law, asked Snyder whether he had privately anticipated the outcome of a dispute over whether Michigan's Constitution protects public pension from cuts in bankruptcy.

"I view that as a legal matter," Snyder said. "If the court was deciding that we had a constitutional obligation, then we would pay it."

Snyder agreed to testify after the United Auto Workers union subpoenaed him to discuss his role in the city's Chapter 9 bankruptcy case.

Snyder refused to answer a question on whether he had shared his opinion with Orr whether the state has an obligation to preserve Detroit retiree pensions. The Michigan Constitution protects public pensions as a "contractual obligation" that cannot be "diminished or impaired," but federal bankruptcy law allows contracts to be severed.

While refusing to share his legal opinion on that issue, Snyder said authorizing Detroit's bankruptcy was a "tremendously difficult decision to make but the right one under the circumstances."

Chapter 9 was the best option after Detroit and the state's emergency manager law because the subject of lawsuits in the days before the filing, he said.

"Bankruptcy's a very last resort," Snyder said. "These actions showed there wasn't a meeting of the mind that there was not going to be a mutual understanding here to resolve this short of bankruptcy."

In a win for the state, Judge Steven Rhodes refused to allow Wertheimer to ask questions about Snyder's New Energy to Reinvent and Diversify (NERD) Fund, which is paying for Orr's condominium at the Westin Book Cadillac building downtown. Wertheimer said the NERD Fund's spending could reveal a "potential conflict" for Orr, but Rhodes ruled it's not relevant to the bankruptcy trial.

Wertheimer is expected to be followed by lawyers for other parties that have objected to Detroit's bankruptcy, including the UAW, the American Federation of State, County and Municipal Employees; Detroit's pension funds; and Detroit retirees.

Earlier in the day, Orr verbally sparred with a lawyer for Detroit's retiree committee who pressed the emergency manager to admit that he planned to violate the Michigan Constitution's protection for public pensions. Orr, refusing to answer the questions directly, said the state's emergency manager law "might have given me" the authority to pursue pension cuts under Chapter 9 bankruptcy.

In the morning, Orr testified that he did not think that Chapter 9 bankruptcy was necessary when he made a much-publicized pitch June 14 to creditors at a Detroit Metro Airport hotel. Snyder appointed Orr to the position three months earlier.

Orr said he received only one serious counter-proposal in the weeks after the June 14 meeting — a letter from a group of insurers led by Ambac Assurance. He said unions didn't make any offers.

"What I said is 'If there's any serious proposals, I'm a phone call away,' " he said. Instead, creditors responded with a flurry of lawsuits that made it difficult to proceed outside of court.

In his July 18 petition for Chapter 9 bankruptcy protection, Orr said the city of Detroit faces long term obligations and debts totaling $18 billion and cannot dig itself out of the financial mess without protection from its creditors.

Day 4 live coverage from the federal courthouse in Detroit

Get all the details as they happened from this Twitter blog by Free Press reporters Nathan Bomey, Matt Helms and other staffers.