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Detroit pension cuts were inevitable, city consultant testifies

A man walks past two abandoned buildings in Detroit on Friday, Oct. 25, the third day of a trial to determine whether the city is eligible for bankruptcy.
A man walks past two abandoned buildings in Detroit on Friday, Oct. 25, the third day of a trial to determine whether the city is eligible for bankruptcy.JOSHUA LOTT / REUTERS

DETROIT — Cuts to Detroit's public pensions and retiree healthcare were inevitable given the city's sagging finances, a top consultant for the city testified Friday during the third day of a trial to determine whether the city is eligible for bankruptcy. 

Money owed to Detroit workers and retirees is a key factor in the case, which will also hear testimony by Kevyn Orr, Detroit's state-appointed emergency manager. Orr is expected to explain efforts to negotiate with the city's numerous creditors, including retirees and pension funds, before deciding to file for the largest-ever Chapter 9 municipal bankruptcy on July 18. 

A key claim made by attorneys representing the city's unions, retirees and pension funds is that Orr and his team were intent on filing for bankruptcy and did not make best efforts to negotiate with them prior to the bankruptcy filing. They also claim that plans to cut pensions would violate the Michigan Constitution. 

On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city's retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion. 

Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them. 

"It was a function of the mathematics," said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr. 

"Are you saying it was so self-evident that no one had to say it?" asked Claude Montgomery, attorney for a committee of retirees that was created by U.S. District Court judge Steven Rhodes. 

"Yes," Buckfire answered. 

Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees. 

On Thursday, Buckfire was questioned by attorneys from Jones Day, the city's attorneys in the bankruptcy filing and Orr's former employer. 

This portion of the trial is to determine whether the city is eligible to undergo Chapter 9 restructuring. To qualify for bankruptcy, Detroit must prove the city is insolvent and that it negotiated in good faith with creditors, or that there were too many creditors for negotiations to be feasible. The city also must prove it desires to enact a restructuring plan. 

Rhodes, presiding over the trial expected to last at least through Tuesday, is not expected to rule until at least mid-November whether the city is eligible to undergo restructuring in bankruptcy. 

If Orr does not testify Friday, he may do so on Monday, when Michigan Gov. Rick Snyder also is expected to take the stand. 

Rhodes is not expected to decide on the eligibility issue until at least Nov. 13, which is the date for attorneys from both sides to file with Rhodes documents defending their notions of what constitutes "good faith" negotiations. 

The city has said about half of its liabilities stem from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions. 

As the cross-examination of Buckfire began Friday morning, Bill Nowling, press secretary for Orr, said on Twitter, "the journey up the River Denial continues for union and creditors attorney(s)." 

Buckfire said the city did not consider the state constitution's protection of pensions in creating its restructuring proposal presentation to creditors on June 14. 

"We did give it some weight, but did not deem it relevant," Buckfire said. 

UAW attorney Peter DeChiara and Montgomery, the retirees committee lawyer, made arguments on Friday morning to Rhodes that Buckfire's testimony should not be allowed because he was not deemed an expert witness by the court. 

Rhodes ruled that Buckfire's testimony would be allowed, in part because he had become an expert after in-depth study of the city's financial status.