Examining the body of evidence in Detroit's bankruptcy trial
Anatomy of a takeover.
Published: April 1, 2014
When Gov. Rick Snyder took his oath of office on Jan. 1, 2011, Michigan had long had a law on the books that allowed the state to step in when municipalities and school districts became mired in a financial crisis.
The state began using appointees to help manage financially troubled municipalities as far back as 1988. Two years later, the practice was given added clout with the enactment of PA 72, which expanded upon the previous law by including school districts.
Beginning in 2000, first under Republican Gov. John Engler and then Democratic Gov. Jennifer Granholm, emergency financial managers, or EFMs, were appointed in an attempt to right the fiscal ships of Hamtramck, Highland Park, Flint, Ecorse, Pontiac, Benton Harbor, Three Oaks and Detroit Public Schools. In nearly all those cases, African-Americans were the majority of residents.
Although emergency financial managers had mixed results, Detroit Public Schools proved to be a particularly thorny problem. When EFM Robert Bobb tried to take control of the curriculum, the school board sued in 2010 and won, with the court ruling that the authority of EFMs was limited to financial matters. For those seeking greater control on the part of the state, it was a significant setback.
It didn’t last long, though. In March of 2011, just two months after he took office, Gov. Snyder signed into law PA 4, the “Local Government and School District Fiscal Accountability Act.” It was widely seen as a response to the ruling in the DPS case.
The new act greatly expanded the scope of power wielded by appointees, a fact reflected in the change of their titles from “emergency financial managers” to simply “emergency managers.”
No state in the country had a law that put so much power into the hands of just one person as PA 4 did. These appointees could cancel collective bargaining agreements and other contracts, disregard existing local ordinances, create new laws, sell off public assets and eliminate the salaries of local elected officials. They also decided how much authority, if any, duly elected officials retained. In Benton Harbor, for example, the city council there was only allowed to open meetings, approve the minutes of its previous meeting, and adjourn the meetings. Otherwise, they were totally denuded of power.
The pros and cons of what would become PA 4 were laid out prior to its passage in a bipartisan analysis by the Treasury Department. In terms of positives, the analysis determined that the legislation provided “critical tools to local administrators and emergency managers to proactively address fiscal and academic problems. Without the capacity to address the fundamental cost structure of local units of government emergency managers can’t bring local units into a state of sustainable fiscal health. Allowing these cost problems to persist only ensures that any future mitigation will be more painful and more costly for the local unit and its residents.”
As for the “con” side of the analysis, this was the conclusion:
“This bill allows emergency managers too much power and control over local units of government. Emergency managers can’t be trusted to act in the interests of the local unit and will use the enhanced powers granted under this bill for their own gain. Stripping local officials of their powers is anti-democratic.’
The swift passage of PA 4 was accompanied by a highly controversial legislative maneuver that allowed it to be implemented immediately, instead of 90 days after closure of the legislative session in which it was passed, as is supposed to be the case in non-emergency situations. The well-founded reason for that 90-day rule is to give opponents of a law time to gather signatures for a referendum before legislation can take effect if there is strong public opposition.
The immediate-effect option was originally intended to be used only rarely, but has widely been abused by both parties for many years. In the case of PA 4, however, it was particularly egregious because there is much evidence showing that it never attained the required two-thirds majority the state constitution requires for it to be implemented.
As pointed out in a recent 2-1 ruling by the U.S. Sixth Circuit Court of Appeals, “… Public Act 4 passed in the House with sixty-two votes — twelve short of the two-thirds requirement for an immediate effect motion. Yet, despite the clear absence of the necessary two-thirds vote, the House proceeded to give Public Act 4 immediate effect over the objections of the minority party.”
A video of the vote shows only two seconds elapsing between the moment the rising vote was called for and when it was declared to have passed. There clearly wasn’t enough time for legislators to even stand up, let alone to actually conduct a count. Adding to the implausibility was this fact: Achieving the necessary two-thirds majority would have required 12 legislators to suddenly reverse course and support the immediate implementation of a bill they’d just voted against.
“Apparently, a two-thirds vote occurs whenever the presiding officer says it occurs — irrespective of the actual vote. This authority is unchecked and often results in passing motions for immediate effect that could not receive the constitutionally required two-thirds vote,” stated the appellate court’s majority opinion. “Apparently, the Michigan Legislature believes the Michigan Constitution can be ignored.
“Public Act 4 exemplifies the farce.”
That apparent affront to democracy was compounded a year later, when opponents of the law gathered more than 225,885 signatures, 65,000 more than the 161,000 needed to place a referendum on PA 4 on the ballot.
However, when it came time to certify the signatures, the state Board of Canvassers, on a party line vote, stopped it from going forward. Helping spearhead the effort was a group of conservative businessmen, including the head of government relations for the Michigan Bankers Association.
The foremost reason for keeping the measure off the ballot was a claim that the heading on the petitions wasn’t the correct font size. Lawyers for the state, representing Gov. Snyder and Attorney General Bill Schuette, filed briefs supporting that rationale. The case went all the way to the Michigan Supreme Court, which, in a split decision, eventually ruled that the referendum met the requirements to be placed on the ballot.
Part of what’s significant about the drawn-out struggle is that once a referendum on a law is placed on the ballot, that law is automatically put on hold until voters have their say at the polls. Instead of that happening in April, when the ballot signatures were first submitted, the measure didn’t officially qualify for the ballot until August, after the state Supreme Court issued its ruling.
So, the “farce” of immediate implementation and a highly partisan dispute over font size, in tandem wrongly enabled EMs to wield their extraordinary powers for much of 2011 and 2012.
On Nov. 6, 2012, when voters were able to weigh in on what showed up on the ballot as Proposal 1, the law was struck down, by a margin of 52 percent to 48 percent.
It was a victory both costly and fleeting.
As reported by the Michigan Campaign Finance Network, a nonprofit group that monitors election spending, the proponent of Prop 1 [the referendum on PA 4], Stand Up for Democracy, raised nearly $2 million. The American Federation of State County and Municipal Employees (AFSCME) Michigan Council 25 gave $1,829,000, or 91 percent of that amount.
“There was no focused financial opposition to Proposal 1 after it survived a legal challenge put forth by Citizens for Fiscal Responsibility,” the group notes.
The reason for union involvement was clear. Along with the “right to work” legislation passed during a lame-duck session in December 2012, the emergency manager law was seen as a direct threat to the power of organized labor because it gave state appointees authority to void contracts with unions and prevent collective bargaining for up to five years.
On the other side, given the intensity with which Citizens for Fiscal Responsibility fought in court to keep the question of PA 4 from being decided by voters, it might have seemed odd at the time that supporters of the law didn’t carry that same intensity into the election.
In retrospect, though, it now appears clear why there was no all-out effort to protect PA 4 at the polls: A backup plan was already in the works.
As early as March 2012 — just a month after organizers announced that more than enough signatures had been collected to put a referendum on PA 4 on the ballot for November — state officials at the highest levels began to discuss crafting new legislation that could be enacted if the existing emergency manager law were to be repealed at the polls, according to documents in the bankruptcy case file.
(On the witness stand, Gov. Snyder offered a different view, testifying that the attention being paid to new legislation in March was only with an eye toward improving on PA 4.)
That effort would result in PA 436, a second emergency manager law introduced a month after PA 4 was repealed by voters.
Emails entered into evidence in the bankruptcy reveal that Jones Day, acting in concert with Miller Buckfire — a private investment banker and consultant based in New York City — was advising State Treasurer Andy Dillon on tactics. Jones Day was offering its services free at that point. Miller Buckfire, like Jones Day, has an extensive history of working on bankruptcies.
One of the efforts provided by the two firms involved assistance in drafting a consent agreement outlining 21 different reforms the city of Detroit needed to implement over a five-year period in order to avoid having an emergency manager installed.
On March 3, 2012, Jones Day attorney Heather Lennox sent this email to state Treasurer Andy Dillon:
“Attached for your review and consideration is a draft consent agreement, which has been reviewed by Miller Buckfire and Huron [another consultant]. Please let us know if you have any comments or if you’d like to convene a call to discuss anything. Many provisions in here are designed to take advantage of PA4 while it is still in existence …”
Think of the consent agreement as part of a continuum of measures, one of the steps along the way of increasing state control authorized by PA 4 as a way to deal with financially struggling cities.
At the time, part of the concern on the part of the state was that, if the challenge to PA 4 made it to the ballot, the consent agreement might be rendered void because such compacts were authorized by the EM law.
“We spoke to a person from Andy’s office [state Treasurer Andy Dillon] to get their thoughts on some of the issues,” according to a March 2, 2012 Jones Day email with the words “Consent Agreement” in the subject line. “I thought MB [Miller Buckfire] was also going to try to follow up with Andy directly about the process for getting this to the Governor, but I am not sure if that happened …
“The cleanest way to do all of this probably is new legislation that establishes the board and its powers, AND includes an appropriation for a state institution. If an appropriation is attached to (included in) the statute to fund a state institution … then the statute is not subject to repeal by the referendum process.”
It’s not clear, but the board mentioned in the email likely refers to “transition advisory boards,” a feature added to PA 436 that wasn’t in its predecessor. Such boards are put in place to help the state retain a measure of control once emergency managers have left and local officials are again allowed to do the jobs they were elected to perform.
The idea of including an appropriation in the new legislation can be read as an obvious suggestion to avoid the same democratic process that allowed voters to reject PA 4: Any Michigan law that includes an appropriation cannot be challenged in a referendum.
PA 436, which passed in a lame-duck session of the Legislature just before Christmas in 2012, includes an appropriation.
On the witness stand during the bankruptcy hearings, Gov. Snyder was asked about the $5 million appropriation attached to PA 436. It was, he indicated, an act of benevolence on the part of the state, inserted into the law in order to help already struggling cities ease the cost of paying for an emergency manger and teams of consultants.
“Part of Public Act 436,” the governor testified, “is saying we were going to relieve the cities of the burden of paying for the emergency manager because that is a burden on them, so we needed an appropriation to do that, and it was the simplest best way to do it, in my view, along with the fact significant dollars were being spent on consultants in some capacity, whether it be the city or the state, and for us to continue to do consulting work to help cities out across our state is by having that additional appropriation we’d have those resources available.”
Others, however, ascribed more cynical motives to the inclusion of an appropriation in the new law. One of those people was the man responsible for helping move the bill through the legislature: Howard Ryan, the legislative assistant for the Michigan Department of Treasury. In Ryan’s deposition, the following exchange occurred:
“Based on your conversations with people at the time, was it your understanding that one or more of the reasons to put the appropriation language in there was to make sure … the new act could not be defended by a referendum?” an attorney representing retirees asked.
“Where did you get that knowledge from?”
“Well, having watched the entire process unfold over the past two years.”
“The governor’s office knew that was the point of it?”
As for the motivation behind approving PA 436 less than two months after voters had repealed a law that contained most of the same provisions, one of the people taking a cynical view of the maneuver was Orr.
In January of 2013, after he’d been asked by a representative of the governor to become Detroit’s EM, Orr began reviewing the law to obtain a better idea of what he’d be getting into. After doing so, he came to a conclusion that aligned with Ryan’s view.
“… Michigan’s new EM law is a clear end-run around the prior initiative that was rejected by the voters in November,” Orr wrote in an email to one of his Jones Day colleagues.
And then he adds:
“So, although the new law provides a thin veneer of a revision, it is essentially a redo of the prior rejected law and appears to merely adopt the conditions necessary for Chapter 9 filing.”
More than seven months earlier, Jones Day had prepared briefing papers “in connection with the Detroit matter” with such titles as “Summary and Comparison of Public Act 4 and Chapter 9” and “Memoranda on Constitutional Protections for Pension and OPEB Liabilities.”
(OPEB is an acronym for Other Post-Employment Benefits, which primarily refer to health care and life insurance.)
In the summer of 2012, a top Jones Day attorney requested copies of these documents for a meeting with Kenneth Buckfire, co-founder of Miller Buckfire, and Gov. Snyder.
Throughout their depositions and court testimony, Gov. Snyder, then-Treasurer Dillon, Orr, and Buckfire repeatedly and emphatically denied that they were actively planning to pursue Chapter 9 bankruptcy for the city. What they did say is that, if it was discussed at all, bankruptcy was only seen a last resort and that they were simply being responsible stewards of the public trust by preparing for all contingencies just in case other efforts failed to keep Detroit solvent.
That remained their public posture throughout the first half of 2013.
Although that story remained consistent, the new year brought some big changes.
Despite increasing state control over the city’s finances throughout 2012, starting with the consent agreement and then through a so-called “memorandum of understanding” that imposed new requirements in November of 2012, Detroit remained dangerously close to insolvency.
In an attempt to keep paying its bills, a $137 million bond was issued. The money, though, was put into a state-controlled escrow account, with the Treasury Department able to withhold the release of funds if Detroit officials didn’t comply with the terms of the November compact, which was called the “Milestone Agreement.”
As the Bing administration was imposing furloughs and health-care cuts on some staff and negotiating benefits cuts with others, the city, acting at the direction of the state, signed a $1.8 million no-bid contract with Miller Buckfire. In addition to its role as an investment banker, one of the first tasks it assumed was a key role in the selection of a law firm that would take the lead in the city’s restructuring efforts.
Even though Miller Buckfire was technically employed by the city, it was state Treasurer Dillon who wanted the firm to be involved in the selection process, Kenneth Buckfire testified during an August 2013 deposition.
Five law firms were invited to make a pitch to state and city officials who had gathered at a hotel at Detroit Metro Airport to interview the various candidates on Jan. 29.
Jones Day was one of those five firms, and Kevyn Orr, a bankruptcy expert who had worked on the Chrysler bankruptcy, was part of the delegation.
One day before that meeting, Miller Buckfire sent Jones Day attorney Corinne Ball an email that she shared with Orr. That email was entered into evidence in the bankruptcy proceedings, and Orr was asked about it on the witness stand. The email referenced “questions that Miller Buckfire has drafted for the interview.”
“You see that?” Orr was asked by Lynn Brimer, an attorney for the Retired Detroit Police Members Association.
“So the Jones Day team had the interview questions prior to the interview. Is that what we can interpret from this?”
“I don’t know that,” Orr responded. “You could interpret that.”
That same email also strongly advised the Jones Day pitch team not to disclose that it had secretly been assisting the state the previous year in matters such as the consent agreement, putting in 1,000 hours of work it didn’t charge for.
“Just heard from Buckfire,” Jones Day attorney Corinne Ball wrote to Jeffrey Ellman, one of the authors of the 2011 law journal article, on Jan. 28. “… Strong advice not to mention 1000 hours except to say we don’t have major learning curve.”
According to published reports, it was also revealed during the trial that Kenneth Buckfire was aware that Jones Day had advised the state in April of 2012 that it should authorize bankruptcy proceedings for the city because the pending PA 4 referendum threatened the state’s ability to control Detroit’s financial operations. Buckfire testified that he didn’t reveal that information to city officials when they hired his firm in Jan. 2013.
At that time, Mayor Dave Bing, according to his deposition testimony, was opposed to both the installation of an emergency manager and bankruptcy because he thought both were unnecessary.
Subsequent to the meeting at the airport, Mayor Bing’s office broadened the search on Feb. 27 by inviting more than a dozen firms to submit official proposals describing their qualifications to conduct a “complete and independent legal review” of the city’s “current and future financial and operational situation,” according to an article in The American Lawyer.
Fourteen firms, including Jones Day, responded. A 24-point system was used to help evaluate their qualifications. Jones Day came out on top with 21 points, one more than the next closest competitor.
The matrix used to evaluate the firms was designed by Miller Buckfire, which has continued to work for the city.
Bing selected Jones Day to lead the city’s restructuring efforts on March 11. Orr, however, had recused himself from Jones Day’s involvement with the city at that point. Instead, he’d been tapped to play a different role.
Shortly after the Jan. 29 meeting at the airport, Snyder confidant Richard Baird reached out to Orr to see if he’d be interested in the EM job — even though there had been no official disclosure that Snyder had decided to appoint an EM.
That was Orr’s “Hell no!” moment.
He’d apparently made a big impression on the state team that was at the airport meeting. The fact that he completely lacked the type of managerial experience that would be expected from someone being considered for the complex job of running a city the size of Detroit didn’t seem to be an impediment. He had an impressive résumé, with a 33-year law career focused almost exclusively on bankruptcies. He’s also African-American, a factor apparently taken in consideration by the state when choosing who’ll be the person given control over a city that’s more than 80 percent black.
“I think it was important to Lansing that the financial manager would be of African-American descent,” Bing said during a deposition taken last October.
On March 14, the state’s Emergency Loan Board — which is technically responsible for the hiring of an emergency manager — rubber-stamped the selection of Snyder’s choice and approved the appointment of Orr to take control of Detroit. Jones Day began working on the city’s restructuring the next day, even though the law required that the City Council approve the contract — which was capped at $3.3 million but contained the stipulation that the cap would be removed if the city were to file for bankruptcy. That contract didn’t receive formal approval until April, during a raucous meeting at which two protestors were arrested.
By that point, it really didn’t matter what the City Council decided. Orr, as EM, had the authority to approve the contract regardless of the vote.
Among the issues addressed during a widely reported May 14 press conference announcing Orr’s appointment was the potential for bankruptcy.
“I am hopeful to engage in fruitful and productive discussions without the need to resort to bankruptcy,” Orr said.
He emphasized that he didn’t want to resort to the “cudgel” of Chapter 9 bankruptcy, saying that he preferred pursuing a “consensual resolution.”
“When I say consensual,” he explained, “I mean really, let’s get at it and work together, because we can resolve this, people of good faith.”
Four months later, Orr’s team, after receiving the go-ahead from Gov. Snyder, filed for the largest municipal bankruptcy in U.S. history.
At the ensuing hearings, the question of how much good faith Orr himself brought to the table would become a key issue.
As he summed up the composite narrative presented during the bankruptcy eligibility proceedings, Judge Rhodes explained the position held by creditors this way:
“The penultimate moment that represented the successful culmination of the plan was the bankruptcy filing. It was accomplished in secrecy and a day before the planned date, in order to thwart the creditors who were, at that very moment, in a state court pursuing their available state law remedies to protect their constitutional pension rights. ‘In the dark of night’ was the phrase used to describe the actual timing of the filing. …
“Another oft-repeated phrase that was important to the objectors’ theory of the city’s bad faith was ‘foregone conclusion.’ This was used in the assertion that Detroit’s bankruptcy case was a ‘foregone conclusion’ as early as January 2013, perhaps even earlier.”
As was pointed out earlier, Rhodes made it clear that he wasn’t necessarily buying the entire composite narrative, but he also asserted that parts of it were indeed supported by the evidence.
Referring to what he described as the “orchestrated lead-up” to the bankruptcy filing, Rhodes rhetorically asks, “… was the City of Detroit’s bankruptcy filing a ‘foregone conclusion’ as the objecting parties assert? Of course it was, and for a long time.”
Nonetheless, Rhodes, on Dec. 5, allowed the city to formally enter bankruptcy.
Before doing so, though, he inserted into the record a telling paragraph devoid of the italic type he used to distinguish the composite narrative, indicating that these words reflected what the court had determined to be true:
“At the June 10, 2013 community meeting, Mr. Orr was asked a direct question — what is going to happen to the City employee’s pensions? Mr. Orr responded that pension rights are ‘sacrosanct’ under the state constitution and state case law, misleadingly not stating that upon the city’s bankruptcy filing, his position would be quite the opposite. In response to another question about whether Mr. Orr had a ‘ball park estimation’ of the city’s chances of avoiding bankruptcy, Mr. Orr responded that, as of June 10, there was a ‘50/50’ chance that the City could avoid bankruptcy, knowing there was no chance of that.”
Orr’s lack of candor produced an interesting exchange between him and the judge during the eligibility trial.
“Despite the implications, I wasn’t attempting to mislead anyone,” Orr testified as he attempted to explain what he meant by the “sacrosanct” comment.
That statement prompted Judge Rhodes to interject a rare question of his own.
“Excuse me one second,” said the judge. “What would you say to that retiree now?”
“I would say his rights are in bankruptcy now. I would say his rights are subject to the supremacy clause of the U.S. Constitution.”
“That’s a bit different than sacrosanct, isn’t it?” noted the judge.
As it stands now, it is uncertain how much of a sacrifice Detroit’s retirees are going to be required to make in order to help Detroit shed its debt. The current proposal from Orr — in the plan of adjustment submitted to the court — is calling for a 26-percent cut in monthly pension payments to general retirees. Currently, their average yearly payment is less than $19,000. Police and fire retirees, who receive pensions averaging about $30,000 per year, would take a 6-percent cut. Theirs is not as severe because, unlike general retirees, they aren’t eligible for Social Security.
In addition, both will face drastic reductions in their health-care benefits. They’ll also lose cost of living adjustments (COLA) intended to protect their payments against inflation.
If they don’t accept that offer quickly, and take advantage of a so-called “grand bargain” that proposes having the state, foundations and the Detroit Institute of Arts kicking a total of more than $800 million into the deal, the deal degrades to a 34-percent cut for general retirees and 10 percent for police and fire. By some estimates, if the loss of COLAs is factored in, the actual loss is closer to 26 percent for public safety workers and 50 percent for general service workers.
Consider it the result of the Jones Day playbook being put into action.
There’s another consequence: As of March 21, Jones Day has been paid more than $19.6 million for the services it has provided to Detroit, according to records provided by the city.
In September, when his 18-month tour of civic duty is complete, Kevyn Orr will be free to pursue his desire of moving to the sunny climes of his native Florida and get that convertible he said he covets. That car, by the way, will be a Lamborghini. At least that’s what the man assigned to help save Detroit smilingly told a group of University of Michigan law students last year. Forget about buying domestic. There’s also, he told those law students, dreams of a yacht floating out there on his personal horizon.
In the meantime, much work remains. The bankruptcy and restructuring are ongoing, with incredibly important decisions that will affect the city decades into the future — such as the potential sale of Detroit’s Water & Sewerage Department — yet to be made.
But here is the question:
What are we to think the next time Kevyn Orr says something is sacrosanct?
Curt Guyette is an investigative reporter for the ACLU of Michigan. His work, which focuses on emergency management law and open government in Michigan, is funded by a grant from the Ford Foundation. You can find more of his reporting at aclumich.org/democracywatch.
> Email Curt Guyette