Detroit bankruptcy blog: Kevyn Orr testifies about pension liabilities, his hiring

3 months after bankruptcy filing, trial will determine whether Detroit really is eligible for Chapter 9

Detroit Emergency Manager Kevyn Orr (middle) testifies in city's Chapter 9 bankruptcy filing trial on Oct. 28, 2013.
Detroit Emergency Manager Kevyn Orr (middle) testifies in city's Chapter 9 bankruptcy filing trial on Oct. 28, 2013. (Sketch by Carole Kabrin)

DETROITLocal 4's Rod Meloni is inside federal court for day 4 of Detroit's bankruptcy trial.

9:20 AM --

No protestors outside the federal courthouse today, security line was moderately populated and the proceedings have begun on time. Judge Rhodes is hearing a motion right now filed by the United Auto Workers. They are seeking to strike a portion of the testimony of Conway MacKenzie turnaround expert Chuck Moore from last Thursday where he testified about where he, and in turn Detroit emergency manager Kevyn Orr, came up with the $3.5 billion pension liability number. The UAW says that number overshoots the mark by a lot, Moore is not an actuary and therefore not an expert and so his testimony regarding the pension numbers and the work of the pension taskforce should be stricken. This is a very similar motion to one Judge Rhodes turned away last week. City Attorney Geoff Stewart from Jones Day is now up pleading the case that Chuck Moore answered every substantive question and there was no reason to throw out the testimony.

After about 10 minutes of deliberating Judge Steven Rhodes denied the motion to strike Chuck Moore's testimony.

9:46 AM --

Kevyn Orr is now back on the stand being questioned by Anthony Ulman regarding the pension liabilities the city faces.

Orr's turnaround plan from June 14th, 2013 states the city had a $3.5 billion in pension liabilities.

Orr: I think I have been aware of the amount of pension liability from the beginning.

Ulman: Had you come up with a viable option to reduce pension benefits without filing Chapter 9.
Orr: We looked at options but by July, it became clear there were no other options.

Ulman: Was it your position that there had to be cuts in pensions for active and retired employees.

Orr: I don't know about actives, but yes they would have to be cut.

Ulman: The City has in fact agreed and admitted it intends to cut pension benefits for active and retired employees.

Orr: Yes.

Ulman: It is my understanding you filed for Chapter 9 under PA 436.

Orr: Yes

Ulman: You are aware that PA 4 was removed by referendum and replaced by PA 436.

Orr: Yes I was aware that an appropriation was tacked onto PA 436 to prevent a referendum.

10:09 AM --

The testimony of Kevyn Orr is getting a little more interesting. Ulman showed some emails of Kevyn Orr's from January 2013 within a day or two after he was approached to become emergency manager. Orr stated after doing some reading into PA 4 and its transition to PA 436 [emergency manager law] "Michigan's new law is an end-around PA 4." Later another of Orr's emails said "there is a veneer of a revision, a redo of a rejected law." Ulman asked Orr if he remembered these emails. Orr said yes. Ulman continues going through more of Orr's early emails that said Jones Day and its attorneys were discussing how to approach a Chapter 9 filing with PA 4 in effect.

Orr testified "He did not know in March 2012 that Jones Day was involved in advice to the city and "I had never heard it from anyone at Jones day." About this situation.

Ulman asked a long question regarding whether Kevyn Orr was aware of any chapter 9 cases where the federal authority trumped state authority.

Orr: I cannot answer yes or no. I will give you an explanation. I have handled cases with federal preemption over state law… I was unaware of a specific case where an emergency manager used a chapter 9 to trump state law. I was unaware of other cases.

Ulman: Were you aware of any instances where federal law trumps state constitutional law?

Orr said: Here broadly, federal law overtakes state law. I am aware of cases

Ulman is now showing a communications roll out by Kevyn Orr's media relations advisor Bill Nowling. It has filing day as July 19, 2013 and shows a schedule of events and when they were supposed to happen.

Orr: Yes

Ulman is asking about the filing was done on July 18th at 4:06pm. He is putting up the court filing where the date on the paperwork has the 19th crossed out and the 18th put I,

Ulman: do you remember telling Ken Buckfire that you moved the bankruptcy up because of the hearings going on in Lansing for a Temporary Restraining Order to prevent a chapter 9?

Orr: I don't specifically recall that but I have no reason to doubt it.

Ulman: The filing was made the day before it was planned, can you say whether the TRO influenced your decision to move up the date?

Orr: I think I said before I was prepared to file the case immediately. I said before we were going to give it a month to come up with an alternative proposal. The situation was beginning to file out of control and there were a number of other reasons why we filed when we did outside of the reason you stated.

Ulman: asked Orr whether he knew that the state court ruled after the fact that the TRO would have been granted and the Chapter 9 filing should not happen.

Orr: I am aware there was a state court ruling. I may had made the ruling, aware in substance. Yes.

10:19 AM --

Ulman continues asking Kevyn Orr about the unfunded liabilities and the work done by the Milliman Actuarial Group on the unfunded pension liabilities and when the analyses were completed.

They are now sliding deeply in the weeds of pension actuarial accounting and which discount rates used in determining the unfunded liabilities.

Judge Rhodes is asking Ulman where his line of questioning is going and to move things along.

10:45 AM --

Kevyn Orr just explained how the water and sewer department pensions are considered city debt obligations even though the Detroit water and sewer pensions are not paid out of the general fund but by the Detroit water and sewer.

Ulman begins asking about the DIA and its art ... talking about retaining Christies auction house to value the art.

Ulman: "Is it not a potentially large source of cash?"

Orr: "It is valuable but I do not know whether it is a source of cash for the city."

Ulman: "You are aware of the press reports about the value of the art being in the billions?"
Orr: "Yes."
Ulman: "Would not cash in that magnitude pay for pension obligations for the next several years?"
Orr: "It might."

Ulman: "There is nothing in your plan that takes the art into consideration."
Orr: "We spoke of the DIA but did not talk about the art."

Ulman now asking about water and sewer department valuation, are you aware of how much cash it might bring?"
Orr: "No."
Ulman: Nothing in the June 14th plan shows the water and sewer changes would pay for pensions correct?"
Orr: "We would use money to pay unsecured creditors."
Ulman: "The value of their bonds might go up ... nothing in there that treats the pension benefits above bondholders."
Orr: "There is nothing that treats pension benefits that treats unsecured creditors differently."

Ulman then moves on to whether any negotiations actually took place [negotiations the city is required as part of its bankruptcy eligibility must show were conducted in good faith: he lists a number of meetings and asks:

Ulman: "On June 14th in a meeting, no negotiations took place right?"
Orr: "No."
Ulman: "After June, you did not attend all the sessions or meetings with the unions correct?"
Orr: "Yes."
Ulman went on to ask about the letter requesting permission to file a chapter 9 in the city sent to the governor. You discussed what happened at the various meetings with the unions:
Individual follow up meeting: June 20, city's advisors conducted meetings with unions, 25th, it says advisors met with various persons, general and police retirement systems, due diligence with pension funds, July 10th follow up diligence sessions with the unions and pensions, again July 11, sessions with unions and pensions, negotiations with counterparties to the swap contracts.
"You say the city's negotiations" but this is the only place.

Orr: "The document speaks for itself."

I have nothing further.

Break until 10:55 a.m.

11 AM --

Thomas Di Chiara is a UAW attorney who has taken over the cross examination of Kevyn Orr wanting to know about his pay as emergency manager.

Orr: "I did not take the job for the money."

DiChiara: "How much are you paid?"

Orr: "$275,000 a year."

D: "When you were an attorney at Jones Day you made more than that?"
O: "Yes."
D: "Do you receive any other income?"
O: "I do not receive directly any other compensations. I have since learned they are paid from the NERD fund. I know nothing about that fund. I know it is related to the governor but I do not know."

D: "Richard Baird, do you know him?"

O: "Yes. He works for the state now."
D: "You know he works for the governor?"

O: "His title was transformation officer."

D: "Did he work with the governor?"

O: "To the best of my knowledge he does."

DiChiara continues discussing how Richard Baird spoke with Jones Day's managers asking permission to speak to Orr about being emergency manager.

11:14 AM --

DiChiara continues chipping away at Orr's hiring and how Orr wanted to insulate his former firm Jones Day from conflict of interest issues and also problems with the firm attempting to become Detroit's bankruptcy counsel.

There was an objection to allowing an email regarding Kevyn Orr from Richard Baird the governor's right hand to Kevyn Orr. The document they are looking at now discusses a summary of partnership prior to Orr's hiring that would keep the current executive team in place.

Another set of emails is shown where Richard Baird is talking with Orr about his becoming emergency manager.

11:22 AM --

DiCihara now is asking Orr's relationship with the governor, how often they meet or speak on the phone.

Orr: Weekly

DiChiara: Did you talk about the bankruptcy filing with the governo r weekly?

Orr: No

DiChiara: Do you recall talking with the Governor about Chapter 9 filing?

Orr: Yes in two to five meetings.

DiChiara: He does not want to discuss this because none of the conversations were held outside the presence of lawyers.

Judge Rhodes: What lawyers were present?

Orr offers a laundry list of lawyers from the city, the state.

DiChiara says these lawyers are paid by the citizens of the state and therefore should be public information.

Judge: How does this square with your [DiChiara's] assertion that this fits a scheme?

City Attorney: "We submit these conversations were privileged."

Judge: Should there be a different ruling than the one previously made in this case on this same matter?

Dichiara: These are critical discussions.

Judge: "I will sustain the objection" .. but went on to ask Kevyn Orr whether he had one-on-one discussions with the governor specifically on bankruptcy and Kevyn Orr said: "I don't recall any."
DiChiara takes exception with the judge's ruling.

Judge wants to clarify whether there were discussions outside of legal counsel.

Orr: No, your honor.

11:30 AM --

This is the most informative bit of questioning of the day. DiChiara continued attempting to find out more about Orr's feelings regarding pension benefits and how they fit into the June 14 turnaround plan's introduction and whether negotiations were conducted or possible.

DiChiara: Would you have accepted any proposal that would have not cut pension benefits?

Orr: "We were prepared to accept any counter proposals but that does not mean agree to."
D: "Would you have agreed to any proposal that did not include cuts to pension benefits?"
Orr: "Probably not."

12 PM --

DiChiara wanted to know about Orr's thoughts on how the Flowers lawsuit was being executed and a hearing on a temporary restraining order on a bankruptcy filing.

Orr: "I believe it was behavior that was calculated to preventing me from doing my job."

D: "Couldn't you have waited a few days to see if the judge would have ruled?"

O: "Mr. DiChiara: We had waited almost a month."

DiChiara continued asking about whether Orr had directly discussed with the governor whether he had asked for state assistance regarding pensions.

Orr: "I don't recall."

Judge Rhodes: "Wait a minute. You do not remember asking the governor to write a check for $3.5 billion?"

Orr: "I don't recall asking it in that context your honor. There are things I can testify to."

DiChiara: "Do you recall ever making a request to the governor in any context seeking assistance, financial assistance from the state for some or all of the city's pension obligations?"

Orr: "I don't recall asking for assistance in that form. I do recall asking whether the state had an ability to offer assistance."

After considerable jousting between DiChiara and State attorneys regarding objections to Orr under attorney client privilege having to answer the Judge ordered an answer.

Orr: "The subject was discussed that there was no ability on the state's part to provide any assistance to the city. I don't recall verbatim what was said. It became clear there would be no assistance coming from the state."

DiChiara later asked: "Do you consider it a conflict of interest being paid by the state and receiving housing by the state?"

Orr: "No."

D: "Are you aware of deferred compensation?"

Orr : "Yes."

D: "If you have deferred compensation, are you aware that a pension is earned?"

Orr: "It requires a legal conclusion, it might not be true."

D: "Has the pension already been earned through labor?"
Orr: "Yes."

DiChiara went in another director: Do you believe the city needs capable and committed employees to run the city?

Orr: "Yes."
D: "Have you done any analysis on what cutting pension benefits would do to morale?"
Orr: "No."
Have you done any analysis as to whether cutting pension benefits would impact hiring in the City?
Orr: "Yes I have done my own analysis. We held a job fair and had 1700 attendees. My analysis is that during the course of the job fair ... their morale is increasing. I have spoken with city employees and despite the city's difficulties they are working hard."

D: "Have you done analysis on what the average pension amounts are."

O: "Ranges have gone from 19,000, to 24,000 or 35,000"
D: "Do you know of any insurance that would cover retirees in the event that their accrued pension liabilities?"
O: "Yes."
D: "Is there such insurance?"
O: "No."
D: "Have you done any analysis to determine any retirees whether at $18,000 or $24,000 under your proposal to see if they will be able to make ends meet, put food on the table, buy medications?"
Objection by city on grounds of relevancy.

Judge sustained

DiChiara concluded questioning.

Up next is Sharon Levine for AFSCME

L: "Do you recall receiving a request from Ed McNeil on March 25 inviting you to meet with a coalition of unions and wanted to work together with you?"
O: "Are you asking whether this was the request that was taped to the door?" "I think I said I was willing to meet with anyone."
L: "Isn't it true you never actually met with the coalition of unions
O: "Yes that is true
L: "Is it your position that you directed someone on your behalf to meet with the coalition of unions?"
O: "Are we still talking about the request?"
L: "Yes."
O:" The request was to continue collective bargaining and collective bargaining had been suspended under PA 436.

Judge ordered lunch break until 1:30 p.m.

Before leaving the bench Judge Rhodes instructed Kevyn Orr to just answer the questions. Orr apologized.

Judge: "We're going to be here a really long time if you insist on going on and on."

Orr: "I apologize your honor."
Judge: "I will accept your apology if you accept your attorney's advice and my advice."

2 PM --

Kevyn Orr has returned to the stand in the afternoon session which is only going until 3 p.m. Apparently duly chastened for expanded answers by the judge his new favored response is, "I don't know," as he is spending a lot of time answering questions regarding his understanding of pension benefits and their possible cut if the bankruptcy is allowed to go forward.

AFSCME attorney Sharon Levine started the afternoon session:

L: "When it comes to pension benefit cuts, how would individual retirees share in a two billion dollar note and would they have to file personal claims?"
O: "I don't know."

L: "How would they get their pro rata shares?"

O: "I don't know."

Later Levine asked him about his knowledge of his former firm [Jones Day] had a relationship with the governor or the state of Michigan or the City.

O: "I don't know."

Sharon Levine stepped down. Jennifer Green representing the pension systems is now cross examining Kevyn Orr.

2:30 PM --

Jennifer Green continues her cross: She inquires about whether the State would step in and offer assistance with pension benefit shortfalls. She showed an email from Jones Day [Orr's prior employer] that said "state will probably step up to deal with, but thus far has failed to concede this point at all."

Green wanted to know whether Orr knew about the email or Jones Day's relationship with the city. He said he did not know. Green's questioning continued pressing him on the notion whether he understood pension benefits are sacrosanct and whether somehow his position on what should happen with pension benefits had changed. At one point Orr said the following: "I said previously in my experience there is Federal supremacy and I'll stand by those statements."

At that point Green showed a video of Kevyn Orr answering a question at the June 14 creditors presentation. He was asked if his answer that day was correct. Orr answered, "I don't know."

Then Green showed a video of a meeting Orr had with retirees at Wayne State University a few days before the June 14 creditor's proposal prior to the bankruptcy filing . He took a question from a Detroit retiree inquiring about what he would do with pensioners and their benefits and crime. Orr explained to the man in the meeting pensions were sacrosanct meaning they cannot be touched.

Green: "You told them no cuts and four days later there were cuts ... ?"

O: "It is what is ... whatever is in the plan."
Green asks again.
O: "Yes."
Green: "When did you realize pension benefits were going to have to be cut?"

O: "I wasn't sure Chapter 9 was necessary. On the 10th and the 14th June we were negotiating."

Green then wanted to know about when he was being consulted on Chapter 9 with his advisors.

O: "Chapter 9 had been discussed since 2005 Miss Green."

You had been in contact with your financial advisors throughout. Chuck Moore was one on the financial advisory task force.
Shows email:

Green: "Do you recognize this email dated June 2, 2013?

O: "Yes."

G: "There is an email from Chuck Moore to you discussing a lengthy call with Milliman and you received this email right/"
O: "Yes I believe so."
G: "It talks about, 'we anticipate a significant reduction in already accrued benefits will be required in order to get required contributions to the level of available cash to service the UAAL. It appears this may be only possible in a Chapter 9 proceeding.'

So did you knowingly give improper testimony on the 10th? [to the retirees?]"
O: "No."

Slideshow: Protesters outside Detroit's bankruptcy trial

Read: Judge: Emails, docs in Detroit EM case won't be released

Read: Judge: State must release names of Detroit EM candidates

Special section: Detroit bankruptcy

About the Author: