Oct. 28, 2013 at 6:54 PM ET
DETROIT — Detroit's emergency manager painted a picture of a city in dire financial straits in testimony on Monday, with budgets so strained that bumpers were falling off police cars, as he laid out the city's case of why a municipal bankruptcy filing was the only way back to health.
And in a rare court appearance by a sitting governor, Michigan Gov. Rick Snyder defended the city's bankruptcy filing, stating in court that he followed the state and federal constitutions while addressing fiscal issues that had built up in Detroit for more than half a century.
Unions, pension funds and retirees are opposing Detroit's bankruptcy petition, and federal bankruptcy court Judge Steven Rhodes will rule on Detroit's eligibility after a multi-day proceeding expected to last into next week.
Snyder said the Michigan and U.S. constitutions do not prevent actions that he took, even though the Michigan constitution prohibits diminishing pension payments to retired employees. Kevyn Orr, the emergency manager, has indicated that cuts to pension benefits would be part of a Detroit bankruptcy restructuring plan.
"I believe I am following the constitution and the constitution of the United States, which treat pensions as a contractual obligation," Snyder said.
Orr testified Monday that federal law trumps state law, so cutting pensions would be legal despite Michigan's constitutional provisions against reduction of pension benefits.
Creditors claim that he violated the state's constitution by approving the bankruptcy because he knew that Detroit's restructuring proposal would cut retiree pensions, which are protected by Michigan's constitution.
SIX DECADES OF URBAN DECLINE
Snyder said during his testimony that the bankruptcy filing was the culmination of six decades of urban decline. "I describe it as the largest issue in our country. This has been a large issue for 60 years," he said.
In response to questions, Snyder said there were no discussions between the city and state about a potential state financial bailout for Detroit. He also said he was not certain if there "necessarily have to be" pension cuts but stated that it was not his role to "make that call."
Michigan's emergency manager law requires Snyder to give permission before any city files for bankruptcy. Snyder said he could have put conditions on Detroit's bankruptcy filing, including protections to pension benefits, but decided against such a course.
"We're in a crisis mode. It could cause more delays," Snyder said.
Judge Rhodes ruled during Snyder's testimony that attorney-client privilege applied to any conversations Snyder had where attorneys from the city were present. After that, Snyder invoked attorney-client privilege numerous times about discussions related to Detroit's deteriorating financial situation over a two-and-a-half-year period before the city's July 18 bankruptcy filing.
In one instance, Snyder invoked privilege when he was asked whether he had considered restructuring proposals that did not cut retiree pension payouts.
Sharon Levine, a lawyer for the American Federation of State, County and Municipal Employees asked Snyder whether a June 14 proposal to creditors by Orr made it clear to individual retirees how much their pensions would be cut.
Snyder said he could not answer because it was a complicated legal issue.
"But governor, if you don't understand it, how does the 86-year-old understand it?" Levine said.
PROTESTERS MARCH OUTSIDE COURT
Ahead of Snyder's testimony Monday afternoon, about 100 protesters, a handful carrying signs with photos of Snyder with devil's horns, marched outside the Theodore Levin United States Courthouse in downtown Detroit, chanting "Hey, hey, ho, ho, Rick Snyder has got to go."
Earlier Monday, Orr in his testimony painted a picture of a city in dire financial straits before the city filed for bankruptcy July 18.
Orr noted that a number of lawsuits were filed in the weeks before the city filed for bankruptcy, saying the litigation made it clear that city creditors were not willing to make compromises on reducing Detroit's debt.
"Given the amount of litigation, it was clear to me there was going to be no other way to pursue a comprehensive and orderly restructuring of the city's problems in an expeditious way," Orr said.
EVEN GOOD NEIGHBORHOODS HAD BLIGHT
In describing the level of Detroit's financial distress and how that was affecting life in the city, Orr said, "Every neighborhood, even the good ones, had some degree of blight."
To be eligible for a Chapter 9 municipal bankruptcy, Detroit must prove it is financially insolvent, that it negotiated in good faith with creditors or that there were too many creditors to make negotiation feasible. It also must establish that it has a desire to restructure its finances.
Detroit is some $18.5 billion in debt, which Orr says includes $3.5 billion in pension debt.
The birthplace of the automotive industry, Detroit was once the fifth-largest U.S. city, with a population peaking in the 1950s at 1.8 million. Today, the population is under 700,000, with 25 percent of residents having moved out during the last decade.
Early in his testimony, Orr said it was clear Detroit was in financial straits from the time he arrived on the job in mid-March.
"I knew things were bad. It was somewhat shocking just how dire it was," Orr testified. The city's budget is so strained that bumpers were falling off police cars and children were afraid to walk to school because police could not keep streets safe, Orr said.
"No one, on a serious basis, has ever disputed to me that the city is insolvent," Orr said.
Copyright 2013 Thomson Reuters.