Detroit public employee unions are dead-set on reversing the Detroit bankruptcy and they have evidently decided the best way to do so is arguing that — despite its $18 billion of debt — the city isn't actually broke.
In a court hearing Thursday on Detroit's bankruptcy, American Federation of State, County and Municipal Employees lawyer Jack Sherwood drilled Ernest & Young's Gaurav Malhotra, a financial consultant to the city, about why it did not sell off assets like the Detroit Institute of Arts collection.
The point of the questioning was to argue that the city could have raised enough funds through various means to at least get breathing room from its creditors. The art collection, for example, has been valued at $2.5 billion.
“Was Miller Buckfire concerned that asset monetization in March 2013 would have a negative impact on the city of Detroit’s ability to prove that it was eligible for Chapter 9 bankruptcy?” Sherwood asked the financial consultant, according to the Detroit News. Buckfire was an investment banker working with the city on its debt issues.
United Auto Workers lawyer Babette Ceccotti argued in her testimony a day earlier that there was a "deliberate plan" to push Detroit into bankruptcy.
That result, she claimed, would allow the city to trim pension obligations, something that would be otherwise prohibited under the Michigan state constitution.
"We think that by connecting all the dots here, the plan was to use Chapter Nine," she said. Instead, the city should have negotiated further with its debtors.
This would suggest that the unions have departed from their original strategy, which focused on the state constitution's prohibition on cutting pensions. Most legal experts have predicted though that argument will be trumped by federal bankruptcy law.
The state has pressed back hard on the idea that bankruptcy was the plan all along. Bruce Bennett, the lawyer representing the city in the filing, said state officials and financial consultants tried to talk to their creditors, including the unions, but the talks became “impracticable.”
“I think the city did act in good faith in all the negotiations it conducted,” Bennett said. “The negotiations were unsuccessful.”
AFSCME's Sherwood pressed Malhotra about the details of the talks between the state and the city for staving off bankruptcy. Malhotra said little had come of it. The main option they had was just try to kick the can further down the road.
"We had a lot of meetings with city officials to see how to preserve cash over the next few months. What the city could impact in terms of permanent cost reductions, those options were very limited. The majority of any savings would come from deferral of either pension-related costs or additional health-care related costs," Malhotra said.
Detroit was forced into bankruptcy in July by an emergency manager appointed by Republican Gov. Rick Snyder. The manager, Kevyn Orr, is scheduled to testify Friday. Snyder is scheduled for Monday.
Update: This story has been corrected to reflect Detroit's debt. It is roughly $18 billion, not $128.5 billion.