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Detroit CFO testifies in bankruptcy trial, says internal financial controls were 'very poor'

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DETROIT - The chief financial officer Detroit hired just before the city was allowed into bankruptcy testified Thursday that the office had trouble keeping track of how much money was coming in and going out.

A computer system designed to track the city's finances had not been fully implemented when he took the job in late November, John Hill Jr. said during the third day of Detroit's historic bankruptcy trial.

Detroit's internal controls over financial reporting were "very, very poor," Hill said. "The biggest risk is actually not knowing whether all of the transactions have been recorded in the system, and also not knowing on a quick, fast pace whether revenue was coming in as they were intended or expenditures going out."

Detroit wants to cut $12 billion in unsecured debt to about $5 billion through its plan of adjustment, which federal Judge Steven Rhodes must approve. Most creditors, including more than 30,000 retirees and city employees, have endorsed it.

"We'll do everything we can to adhere to that," Hill said of the city's debt-restructuring plan. "If the revenues don't come in as intended in the plan, we'll have to make adjustments. We definitely believe the plan gives us a road map to how we should be operating."

State-appointed emergency manager Kevyn Orr in July 2013 made Detroit the largest U.S. city to file for bankruptcy. Rhodes approved the bankruptcy petition in December.

Bond insurers Syncora Guarantee and Financial Guaranty Insurance Co. are fighting the approval of Orr's plan of adjustment. They say Orr and his restructuring team treat pensioners better in the plan than they do financial creditors. Syncora has said Detroit wants to pay pennies on the dollar for its claim of about $400 million. An attorney for Financial Guaranty Insurance said Wednesday that its claim is about $1 billion.

An issue of contention in the trial is the so-called Grand Bargain — commitments from the state, major corporations, foundations and others to donate more than $800 million over 20 years to soften cuts to city pensions while placing city-owned pieces in the Detroit Institute of Arts into a trust and out of the reach of debtor demands.

Pensioners this summer voted in favour of Orr's plan, which calls for general retirees to take a 4.5 per cent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose a portion of their annual cost-of-living raise.

Without the Grand Bargain money, cuts to pensions are expected to be steeper.

Some creditors want the artwork to be considered assets of the city that should be used to help settle Detroit's debt.

Rhodes has set aside a number of days this month and into October for the trial. Dozens of witnesses are expected to be called — including Orr and possibly Detroit Mayor Mike Duggan.

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