Detroit bankruptcy judge rejects deal with banks
By David Eggert and Ed White, APLANSING, Michigan -- A judge overseeing Detroit's bankruptcy again rejected a deal Thursday to end a disastrous financial agreement with major banks, dealing a blow to officials who want to put the issue behind them as they work on a broader plan to get the city out of the largest public insolvency filing in U.S. history.
January 18, 2014, 12:00 am TWN
Judge Steven Rhodes turned down a US$169 million compromise, saying “it's just too much money.” He had rejected a US$230 million deal on the same grounds in December.
Rhodes didn't offer his own number publicly but encouraged all sides to keep talking. He then cleared the courtroom to talk privately to lawyers.
“It's higher than the highest reasonable number. ... By any rational analysis, it's not close,” the judge said moments earlier.
“This court must be the one to stop it if necessary. It is necessary here,” Rhodes said.
In 2009, Detroit pledged a critical revenue source, casino taxes, as collateral to avoid defaulting on pension debt payments. That agreement allowed the city to get fixed interest rates on bonds with UBS and Bank of America. But it backfired when rates dropped during the recession.
Detroit had lined up a loan to pay for the settlement.
Emergency manager Kevyn Orr wants to get the “swaps deal,” as it's known, out of the way so he can focus on proposing a sweeping plan to deal with the city's long-term debt of US$18 billion. He's pledged to unveil his proposal this month, weeks ahead of schedule.
Gov. Rick Snyder met with lawmakers Thursday in the Michigan capital of Lansing to discuss the possibility of contributing state money to shore up Detroit's pension plans and prevent the sale of city-owned art, days after foundations committed US$330 million to the effort.
The governor spoke with the senators behind closed doors and may soon ask the Legislature to match the foundations' contribution over a number of years, possibly in his February budget proposal.
National and local foundations are committed to providing millions to prevent the sale of city-owned art at the Detroit Institute of Arts and soften cuts to pensions of Detroit retirees.
Orr has said two pension funds are underfunded by US$3.5 billion. A deal involving the state and foundations would help retirees but probably wouldn't alleviate all their pain in a final plan to fix the shortfall.
Rhodes' rejection of Detroit's settlement with the banks was a surprise. Two judges who acted as mediators in the Christmas Eve deal even took the unusual step of publicly endorsing it in a Dec. 30 court filing. The US$169 million deal had included US$4 million in certain costs.
“This settlement ... can best be captured and characterized by the admonition, `Do not allow the perfect to become the enemy of the good,”' wrote Chief Detroit U.S. District Judge Gerald Rosen and U.S. Bankruptcy Judge Elizabeth Perris of Oregon.