October 28, 2013 / 2:52 PM / 4 years ago

Detroit's finances "shocking," city manager testifies

DETROIT, Oct 28 (Reuters) - Detroit's financial status was "shocking" when he first took office, the city's emergency manager said in federal court testimony Monday, and no knowledgeable person ever has disputed his claim that the city is insolvent, he added.

Detroit Emergency Manager Kevyn Orr painted a grim picture of life in Detroit, from a fire department with faulty equipment to blighted neighborhoods where school children say they are afraid of "everything" as they walk to school or their bus stops, at the start of what could be a pivotal day in the city's bankruptcy eligibility trial.

Orr was testifying Monday morning and Michigan Gov. Rick Snyder was expected on take the stand Monday afternoon as Detroit seeks to prove it is bankrupt and entitled to protection from creditors under the federal Chapter 9 municipal bankruptcy law. City unions, pension funds and retirees are among those opposing Detroit's bankruptcy petition, the largest-ever municipal bankruptcy filing.

Resuming testimony from late Friday, Orr on Monday said when he arrived in March, it was clear the city was in dire financial straits. "I knew things were bad. It was somewhat shocking just how dire it was," Orr testified.

He added, "No one, on a serious basis, has ever disputed to me that the city is insolvent."

Orr in March assumed the powers of the elected mayor and city council, appointed by Snyder under Michigan's sweeping emergency manager law. Four months later, the former corporate bankruptcy lawyer took the city to bankruptcy court.

Orr, testifying on the fourth day of the historic Chapter 9 bankruptcy trail on Monday morning, said that the city's public school children have responded that they are afraid of "everything" as they take scary walks to get to school.

"They usually pick up a stick or a rock on the way to school or the way back because that's what they've had to walk through to get to the bus stop to get to school," said Orr in response to a question from Gregory Shumaker, one of the city's attorneys from the Jones Day law firm.

Orr is the fifth, and likely the most important, witness called by the team of lawyers from Jones Day, Orr's former law firm. Snyder is scheduled to take the witness stand Monday afternoon, a rare court appearance by a sitting governor.

Orr and Snyder are among city witnesses seeking to show Detroit has met the test that it is eligible to file for bankruptcy restructuring, which will be decided by the presiding federal bankruptcy judge, Steven Rhodes. To be eligible for bankruptcy, Detroit must prove it is financially insolvent, that it negotiated in good faith with creditors or there were too many creditors to make negotiation feasible. It also must establish that it has a desire to restructure its finances.

Detroit's public sector unions, retirees and pension funds have all objected to the filing. They say the city negotiated in bad faith and argue that Michigan's constitution prevents retiree pensions from being cut.

Orr is expected to face tough questions under cross-examination by lawyers representing the city's unions, pension funds and retirees.

There were precious few protesters outside the courthouse Monday morning, but union officials were expecting a crowd in the afternoon when Snyder testifies.

A Fading City

Detroit, birthplace of the automotive industry that attracted laborers from the U.S. South as it rose to become a manufacturing giant, once had a population of 1.8 million, in 1950, when it was the fifth-largest city in the United States. Today, its residents number less than 700,000, and the city has one of the highest violent crime rates in the country.

It is some $18.5 billion in debt, including what Orr says is $3.5 billion in pension debt.

Orr and his team have asserted that pension liability should be treated as unsecured debt, to be paid at about 16 cents on the dollar in the city's proposed restructuring proposal, should Rhodes agree that it is eligible for bankruptcy.

One of those pensioners is Donald Smith, 68, who sat in a lawn chair he brought with him on a city bus outside the federal courthouse in downtown Detroit early Monday morning.

Smith said he cannot afford to take a pension pay cut. He gets about $840 a month pension for his 29 years of city employment, on top of his monthly $1,000 Social Security benefits, he said.

"After I pay my rent, the phone, the light bill, and for my medicine, I end up with about $200 a month for food and the rest of it," said Smith, who was bundled up in a jacket and scarf as temperature was 35 Fahrenheit (1 Celsius) just before sunrise on Monday.

The trial began last week with three full days of hearings. The city called two of its top financial consultants to the witness stand to highlight the city's financial insolvency. One of the criteria Detroit must meet to prove its eligibility is to show Rhodes that it is insolvent.

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