03.05.14

Don’t Bank on it. After rejecting two earlier proposed settlements, U.S. Bankruptcy Judge Steven Rhodes this afternoon will receive an update about the Motor City’s third proposed bank settlement between Detroit and UBS and Bank of America/Merrill Lynch—a proposal on its interest rate swaps valued at $286 million—under the terms of which the Motor City would will make quarterly payments on the swaps until the bankruptcy case ends, with the payments subtracted from the proposed $85 million settlement. Under the proposed terms of the agreement, UBS AG and Bank of America’s Merrill Lynch Capital Services have agreed to support Detroit’s plan of adjustment. The two banks are expected to be joined by the state of Michigan, also a creditor, in allowing the city to impose cuts on creditors who object to the city’s efforts to shed $9 billion in debt. The Motor City will argue before the skeptical U.S. Bankruptcy Judge Rhodes that suing the banks to invalidate the interest rate swaps would risk incurring time and financial resources it does not have and cannot afford, with spokesperson Bill Nowling noting: “We could spend $40 (million)-$50 million litigating this and lose and still cost the taxpayers $280 million…There’s still a degree of uncertainty, regardless of what the judge says.” Nevertheless, retirees and union leaders vowed yesterday to fight any plan by Detroit to use the proposed a new settlement with the two banks to force them to take massive cuts in the city’s bankruptcy.

Barnum & Bailey. Judge Rhodes’ courthouse will be busy in all three rings today, with the Motor City’s attorneys scheduled to meet with counterparts from the city’s two retiree associations for mediation, with the bone of contention being the proposed freeze in cost-of-living increases—where Detroit Emergency manager Kevyn Orr’s plan of adjustment proposes a 4 percent reduction in police and firefighter pensions and a 26 percent cut in monthly checks to non-uniform city retirees. The city’s plan proposes, in addition, a decade-long moratorium on cost-of-living increases—which the pension funds’ financial consultants estimate would lead to an extra 18 percent reduction in the lifetime benefits for police and firefighters and would give general retirees 13 percent less over time. The associations are hoping to get Mr. Orr to agree to some form of annual cost-of-living increase.  Over the next two days of closed-door mediation, Mr. Orr, in return, is expected to seek support from the city’s nearly 33,000 retired and current city workers to reach an agreement with the city and accept an $815 million pool of state and private funds in exchange for less severe cuts to their pensions. That potential pool, however, itself remains clouded—as the city has yet to learn whether the Michigan legislature will support Governor Rick Snyder’s bipartisan proposal under which the State of Michigan would appropriate $350 million in contributions towards Detroit pension obligations over the next twenty years. And even the uncertainty about the legislature’s actions is matched by uncertainty over the acrobatics in still another ring: will private donors come up with pledges for the promised $465 million match, as part of the resolution for the Detroit Institute of Arts.

Liability Insurance. Just to make sure U.S. Bankruptcy Judge Steven Rhodes will have no time today to lollygag, he will hold a hearing this morning with regard to whether Detroit should underwrite the $602,250 insurance policy for members of a committee of retirees representing former city employees. The city of Detroit, which requested the formation of the nine-person committee and which has been paying the committee’s attorney bills, opposes the request for the “errors and omissions” liability insurance for retiree committee members, $250,000 of which may be refundable, whilst retirees on the committee who are not representatives of labor unions or retiree associations say they need the insurance policy in case they’re sued up to six years after the bankruptcy ends, with its chair, Terri Renshaw, noting: “It’s not the basis of a lawsuit, it’s the cost of defense,” said Terri Renshaw, chair of the Retiree Committee and a former city attorney. “Even a frivolous lawsuit has to be defended. None of us are in a position to be able to afford counsel,” even as, in its court filing, Motor City attorney Heather Lennox called the insurance policy “extraordinary, unnecessary and wasteful” and said it would be “unprecedented” in a Chapter 9 case for a municipality to foot the bill. (The Retiree Committee’s first major decision involved working out an agreement with Kevyn Orr with regard to unprecedented changes to retiree health insurance coverage, with Detroit dropping its traditional plans in favor of giving former employees monthly stipends to purchase private insurance plans—and, in the wake of the committee’s filed suit, agreeing to increase monthly stipends for retirees younger than 65 from $125 to $175, or $300 a month for retired police officers and firefighters or their survivors who are not eligible for Medicare.) The committee members, who are not representatives of labor unions or retiree associations, claim they need the insurance policy in case they are sued up to six years after the bankruptcy ends—noting, as Renshaw says: “It’s not the basis of a lawsuit, it’s the cost of defense…Even a frivolous lawsuit has to be defended. None of us are in a position to be able to afford counsel;” but the Motor City responded by calling the insurance policy “extraordinary, unnecessary and wasteful,” adding it would be “unprecedented” in a chapter 9 municipal bankruptcy case.

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