Detroit couldn't send out bills on time, consultant says

Brent Snavely and Nathan Bomey | Detroit Free Press

DETROIT — Several of Detroit's departments were not able to perform some of the most basic functions when one financial crisis-management firm began working with the city last year.

"Simple things such as getting bills out on time to the right addresses with the right staffing … were both significant deficiencies," Charles Moore of Conway MacKenzie Inc. said Thursday during the city's federal bankruptcy court trial. "Many of the departments couldn't perform some of the most basic functions."

Operations at the city's property tax division and its public lighting department have improved, he said. But both were struggling to properly bill customers last year. The city owns a power plant that supplies electricity to almost 900 public buildings including federal, state and county agencies.

Detroit also owns parking garages that are in disrepair and cannot be fully used because some areas are blocked off, said Moore, managing partner at the Birmingham, Mich.-based restructuring firm.

Moore was the second witness to testify Thursday in a trial that will determine Detroit's eligibility for Chapter 9 bankruptcy. Detroit with a population of a little more than 700,000 became the largest city in U.S. history to file for bankruptcy protection July 18 with more than $18 billion in debt.

However, the city must prove that it is eligible for bankruptcy before it can propose a plan to force creditors to reduce its debt. Most of Detroit's unions, its retiree associations and a retiree creditors committee have objected to the bankruptcy filing.

On Wednesday, hundreds of protesters staged a rally outside the federal courthouse.

On Thursday, few if any protesters were outside, but several Detroit residents did attend the trial. Many residents, retirees and employees fear that their pensions, salary and benefits will be slashed in the bankruptcy process.

Sarella Johnson, 54, of Detroit said she believes that enacting an emergency manager law that allowed Michigan Gov. Rick Snyder to appoint Kevyn Orr as Detroit's emergency manager usurps the democratic rights of residents of the state's largest city.

"If our governor bypasses the constitution of the United States and bypasses the power of the people to vote, … that destroys democracy," Johnson said.

To be eligible for bankruptcy, the city must show that it negotiated in good faith with creditors before it filed, is insolvent and had the proper authority to file from the governor.

Orr is expected to testify Friday and Snyder is scheduled to testify Monday in what is expected to be at least a five-day trial.

Moore said Conway MacKenzie estimates fully addressing blight would cost the city $500 million over six years. He estimates that the city needs to spend $1.25 billion over 10 years to improve operations of all the city's departments.

Cleaning up property and removing abandoned homes reduces crime, improves the city's appearance and helps with property-tax collection, Moore said.

Gaurav Malhotra, a managing director for Ernst & Young, said he is part of a team of accounting experts that have been working with Detroit officials for nearly two years to improve the city's cash management and to better track how much money the city has.

Malhotra said he warned Detroit officials frequently that the city would not be able to fix its long-term financial problems unless it restructured its pension liabilities and obligations.

"During this time frame, I made it very clear that, based on the experience I had over the past 18 months working with the city, that the options that the city was undertaking to preserve cash … were predominantly based on short-term solutions and not actual cash savings," he said.

At times, as the city prepared a presentation for creditors June 14 to press for concessions, Detroit explored selling a variety of assets including Belle Isle, parking garages, Joe Louis Arena and Coleman A. Young International Airport.

But Malhotra said any asset sale would have had no effect on the city's financial problems.

"In my view, those are one-time proceeds .... that do not address the issues with respect to the ongoing operating disbursements and the legacy cost disbursements," he said. "The core structural problems and cash flow problems were that disbursements continued to exceed receipts."

John Sherwood, a lawyer for the American Federation of State, County and Municipal Employees, repeatedly asked Malhotra if the city, its advisers and the Jones Day law firm ever considered postponing asset sales until after it filed for bankruptcy.

"I do not recall any conversations like that," Malhotra said.

Malhotra also said he did not recall any conversations in May 2011 with unions where promises were made for contract concessions that would be only temporary.

The city's financial picture started to become especially dire in December 2012, Malhotra said.

"We were looking at different alternatives for improving cash flows," he said.

At that time, Malhotra was reporting to Detroit Mayor Dave Bing. Then that changed in March when Snyder appointed Orr as emergency manager.

Lawyers for the state of Michigan said Thursday that Snyder has agreed to testify Monday without any time limits. On Wednesday, the state had asked to limit Snyder's testimony to two hours.

U.S. Bankruptcy Judge Steven Rhodes said he would extend the court's session Monday to 5 p.m. so all of Snyder's testimony could occur on one day.