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Detroit Vote Deadline Sets Stage for Bankruptcy Showdown

Photographer: Chris Goodney/Bloomberg

Kevyn Orr, Detroit's emergency financial manager. Close

Kevyn Orr, Detroit's emergency financial manager.

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Photographer: Chris Goodney/Bloomberg

Kevyn Orr, Detroit's emergency financial manager.

Detroit’s public workers, retirees and bondholders finish voting today on a plan that would impose $7.4 billion in cuts on investors and pensioners, just short of a year after Michigan’s biggest city filed a record $18 billion bankruptcy.

Since the July 18 filing, Kevyn Orr, Detroit’s emergency manager, has been negotiating with stakeholders to put the city of 700,000 back on its fiscal feet after years of decline. Imposing cuts was the only way to continue supplying essential services and repair Detroit’s blighted landscape, according to Orr.

Current and former city employees, as well as investors, would be forced to take less than the $10.4 billion they are owed if U.S. Bankruptcy Judge Steven Rhodes approves the city’s plan after a trial set to begin next month. Some bondholders would recover as little as 11 percent of their claims. Others will be paid in full.

“Bankruptcy is never about a win. Bankruptcy is about a settlement,” Mark Young, head of the union that represents city police lieutenants and sergeants, said in an interview. “Nobody should be happy coming out of bankruptcy.”

Young has urged his fellow officers to vote for the plan, which would let police and firefighters collect their full monthly pensions, with small adjustments in cost of living. Retiree health-care and other post-employment benefits would be slashed by 74 percent.

Fairness Hearing

The certified voting results won’t be released until later this month. Rhodes will take the tally into consideration when he decides whether to approve the plan. Individual creditors who can’t afford an attorney can object at a July 15 hearing.

Detroit has successfully fought union efforts to have the bankruptcy dismissed, while warding off challenges by bond insurers and retirees. At the same time, the city and creditors have been negotiating in confidential mediation sessions overseen by the chief federal judge in Detroit, Gerald Rosen.

Weeks after Rhodes issued a key ruling that allowed the city to keep its bankruptcy protection, Orr began announcing deals with different creditor groups. He has tried to speed the bankruptcy process, aiming to get out within 18 months of filing.

Biggest Unions

The biggest unions, including the American Federation of State, Municipal and County Employees and the United Auto Workers, negotiated deals that reduced the size of proposed pension cuts. The unions, and groups representing retired city workers, urged their members to vote in favor of the plan.

Detroit today fended off a challenge from bond insurer Syncora Guarantee Inc. to the city’s use of casino taxes, its main source of revenue. U.S. District Judge Bernard Friedman in Detroit upheld a ruling by Rhodes that the money can’t be frozen because it’s city property and shielded by Detroit’s Chapter 9 filing.

Still, the city has significant hurdles to clear when Rhodes begins hearings next month, said Richard A. Ciccarone, the Chicago-based chief executive officer of Merritt Research Services LLC, which analyzes municipal finance.

Investors owed more than $1.4 billion on pension obligation bonds and the insurers that backed the debt are fighting the plan, arguing that it is unfair. They want Detroit to use its trove of fine art to boost recoveries, either by selling it or using it to secure financing.

Art Valuation

The collection is worth about $3.7 billion, according to a recent appraisal by Artvest Partners. Still, should Detroit try to sell the art in the current market as part of the bankruptcy, it would probably bring in only $1.1 billion to $1.8 billion, according to Artvest.

The city cut a deal with private foundations, state lawmakers and the Detroit Institute of Arts that would bring more than $650 million to bolster the pension systems. The settlement requires that the art collection be protected from a sale to repay creditors.

“There is a little pain for everyone,” Ciccarone said. “That’s what’s necessary in bankruptcy situations.”

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story: Andrew Dunn at adunn8@bloomberg.net David Glovin

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