Michigan governor defends Detroit bankruptcy filing approval

Reuters

By Joseph Lichterman and Bernie Woodall

DETROIT, Oct 28 (Reuters) - Michigan Governor Rick Snyderdefended Detroit's bankruptcy filing on Monday, stating in courtthat he followed the state and federal constitutions whileaddressing fiscal issues that had built up in Detroit for morethan half a century.

Snyder said the Michigan and U.S. constitutions do notprevent actions that he took, even though the Michiganconstitution prohibits diminishing pension payments to retiredemployees. Detroit's emergency manager, Kevyn Orr, has indicatedthat cuts to pension benefits would be part of a Detroitbankruptcy restructuring plan.

"I believe I am following the constitution and theconstitution of the United States, which treat pensions as acontractual obligation," Snyder said.

Snyder's testimony was a rare court appearance for a sittinggovernor and came in the fourth day of a federal trial seekingto determine whether Detroit has a right to protection from itscreditors under Chapter 9 of the federal bankruptcy code.

Unions, pension funds and retirees are opposing Detroit'sbankruptcy petition, and federal bankruptcy court judge StevenRhodes will rule on Detroit's eligibility after a multi-dayproceeding expected to last into next week.

Orr also testified Monday, and stated that federal lawtrumps state law, so cutting pensions would be legal despiteMichigan's constitutional provisions against reduction ofpension benefits.

Creditors claim that he violated the state's constitution byapproving the bankruptcy because he knew that Detroit'srestructuring proposal would cut retiree pensions, which areprotected by Michigan's constitution.

'SIX DECADES OF URBAN DECLINE'

Snyder said during his testimony that the bankruptcy filingwas the culmination of six decades of urban decline. "I describeit as the largest issue in our country. This has been a largeissue for 60 years," he said.

In response to questions, Snyder said there were nodiscussions between the city and state about a potential statefinancial bailout for Detroit. He also said he was not certainif there "necessarily have to be" pension cuts but stated thatit was not his role to "make that call."

Michigan's emergency manager law requires Snyder to givepermission before any city files for bankruptcy. Snyder said hecould have put conditions on Detroit's its bankruptcy filing,including protections to pension benefits, but decided againstsuch a course.

"We're in a crisis mode. It could cause more delays," Snydersaid.

Judge Rhodes ruled during Snyder's testimony thatattorney-client privilege applied to any conversations Snyderhad where attorneys from the city were present. After that,Snyder invoked attorney-client privilege numerous times aboutdiscussions related to Detroit's deteriorating financialsituation over a two-and-a-half-year period before the city'sJuly 18 bankruptcy filing.

In one instance, Snyder invoked privilege when he was askedwhether he had considered restructuring proposals that did notcut retiree pension payouts.

Sharon Levine, a lawyer for the American Federation ofState, County and Municipal Employees asked Snyder whether aJune 14 proposal to creditors by Orr made it clear to individualretirees how much their pensions would be cut.

Snyder said he could not answer because it was a complicatedlegal issue.

"But governor if you don't understand it, how does the 86year old understand it?" Levine said.

PROTESTERS MARCH OUTSIDE COURT

Snyder's testimony marked an uncommon appearance in court bya sitting governor. Bill Ballenger, editor and publisher ofInside Michigan Politics, said no sitting Michigan governor hastestified in court since at least World War Two.

Ahead of Snyder's testimony Monday afternoon, about 100protesters, a handful carrying signs with photos of Snyder withdevil's horns, marched outside the Theodore Levin United StatesCourthouse in downtown Detroit, chanting "Hey, hey, ho, ho, RickSnyder has got to go."

Earlier Monday, Orr in his testimony painted a picture of acity in dire financial straits before the city filed forbankruptcy on July 18.

He said the city's budget is so strained that bumpers werefalling off police cars, as he laid out the city's case of why amunicipal bankruptcy filing was the only way back to health.

Orr noted that a number of lawsuits were filed in the weeksbefore the city filed for bankruptcy, saying the litigation madeit clear that city creditors were not willing to makecompromises on reducing Detroit's debt.

"Given the amount of litigation, it was clear to me therewas going to be no other way to pursue a comprehensive andorderly 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 andhow that was affecting life in the city, Orr said, "Everyneighborhood, even the good ones, had some degree of blight."

To be eligible for a Chapter 9 municipal bankruptcy, Detroitmust prove it is financially insolvent, that it negotiated ingood faith with creditors or that there were too many creditorsto make negotiation feasible. It also must establish that it hasa desire to restructure its finances.

Detroit is some $18.5 billion in debt, which Orr saysincludes $3.5 billion in pension debt.

The birthplace of the automotive industry, Detroit was oncethe fifth-largest U.S. city, with a population peaking in the1950s at 1.8 million. Today, the population is under 700,000,with 25 percent of residents having moved out during the lastdecade.

Early in his testimony, Orr said it was clear Detroit was infinancial straits from the time he arrived on the job inmid-March.

"I knew things were bad. It was somewhat shocking just howdire it was," Orr testified. The city's budget is so strainedthat bumpers were falling off police cars and children wereafraid to walk to school because police could not keep streetssafe, Orr said.

"No one, on a serious basis, has ever disputed to me thatthe city is insolvent," Orr said.

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