Detroit’s deal with swaps investors threatened the city’s best source of cash in the months before it filed the biggest municipal bankruptcy, investment banker Kenneth Buckfire said in a trial to determine whether the city can remain under court protection from creditors.
A 2009 deal gave the swaps investors power to lock up much of the $180 million a year that Detroit gets from taxes on its casinos, Buckfire testified today. That put added pressure on the city, which had only a $7 million cushion on a budget of more than $1 billion, he said.
Buckfire, the co-president of Stifel Financial Corp. (SF:US)’s Miller Buckfire & Co., said he and other advisers “were extremely alarmed” when they received a report on Detroit’s cash position earlier this year. “The city was operating on a razor’s edge,” he said.
Buckfire was the third of five witnesses the city said it will present at the trial in U.S. Bankruptcy Court in Detroit. Lawyers for retired and current city workers have attacked the decision by state-appointed emergency manager Kevyn Orr to put Detroit into bankruptcy, where creditors can’t try to seize assets or file suits that disrupt reorganization efforts.
Buckfire also testified that bondholders demanded full repayment during negotiations designed to avert a bankruptcy, relying on an assumption that general obligation bonds were safe because any municipality that issued them was required to raise taxes to repay the debt.
Under a restructuring proposal made before the city filed bankruptcy in July, Orr said he would pay holders of such bonds and other unsecured debt pennies on the dollar.
Buckfire is scheduled to return to court tomorrow to face questions from union and retiree lawyers trying to get the bankruptcy case thrown out. Buckfire, who grew up in the suburbs outside Detroit, said he has led the city’s financial restructuring team since January.
He has followed Detroit’s financial troubles since it was downgraded by bond-rating firms in 2009, he said. Last year, the state hired him to do a 60-day review of Detroit’s finances. The city later agreed to hire Miller Buckfire after the state required local officials to bring on a financial adviser as a requirement to get more aid.
Earlier, Gaurav Malhotra, a partner at Ernst & Young LLP, testified that Detroit’s elected officials failed to propose any significant cost savings before Orr was appointed in March.
Malhotra who had advised the city since May 2011, was asked by an attorney for Detroit union workers about savings contained in a restructuring plan developed before the state takeover. The lawyer, Jack Sherwood, sought to challenge the need for the city’s $18 billion bankruptcy filing.
Malhotra said he couldn’t remember any cost savings achieved by Detroit’s elected officials “that were of significance.” Selling property to raise money and reduce debt wouldn’t stop the city’s long-term overspending, he said.
Detroit will need to spend about $1.25 billion over 10 years to restructure operations, invest in decaying infrastructure and remove blight, another witness told U.S. Bankruptcy Judge Steven Rhodes today.
Charles M. Moore, a consultant who analyzed the city’s operations, testified that he discovered during his review that “a number of departments were severely broken.” The spending estimate includes $250 million to fix operations for a decade and $500 million for blight removal over six years, Moore said.
In opening statements yesterday, lawyers for the retirees and city workers said Detroit hasn’t met the standard set out in Chapter 9 of the U.S. Bankruptcy Code to remain under court protection.
The law says the city must show that it’s insolvent, that it’s entitled under state law to file for bankruptcy, that it tried to negotiate with creditors or was unable to do so, and that it intends to file a plan to adjust its debts.
Governor Rick Snyder, who testified under oath in a videotaped deposition this month, is prepared to testify in court Monday, said Matthew Schneider, a lawyer with the state. Snyder, a Republican, is being called as a witness by the United Auto Workers, which represents some city workers and is trying to show that the bankruptcy filing wasn’t in good faith.
Rhodes extended Monday’s hearing to 5 p.m. from 3 p.m. to allow Snyder to finish his testimony in one day. Snyder is scheduled to take the stand at 1 p.m.
The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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