April 18 (Bloomberg) -- Detroit is close to agreements with more creditors on a plan to reduce its $18 billion debt load, lawyers for the city told a judge who withheld a final ruling on whether to allow a vote on the proposal.
“We have made, in our view, very significant progress,” David Heiman, a lawyer for the city with Jones Day, told U.S. Bankruptcy Judge Steven Rhodes yesterday in Detroit.
The city reached agreements two days ago with its two pension systems, after settling with some bondholders last week. Pending accords may push back the deadlines for creditor votes by 11 or 12 days, potentially delaying a hearing set for July where Rhodes will consider approving the plan to end the largest-ever U.S. municipal bankruptcy, said Bruce Bennett, another Jones Day lawyer representing Detroit.
Rhodes yesterday overruled initial objections to the disclosure statement explaining the plan to creditors, while putting off approval. Detroit officials agreed to add more details to the statement, based on this month’s creditor settlements, and requested another hearing later this month to resolve any further objections and allow Rhodes to make a final ruling. If he approves, creditors would vote on the plan in May and June.
Any debt-adjustment plan proposed by Detroit’s emergency manager, Kevyn Orr, may need support from the mayor and city council to win the court’s blessing, Rhodes said. Mike Duggan, former president of Detroit Medical Center, was sworn in as mayor on Jan. 1.
“It will be very hard to find feasibility unless the mayor and in his judgment, the city council, fully supports the plan and the city’s commitments under the plan,” Rhodes said. “We absolutely do not want to get to a place,” where whoever is running the city doesn’t support the plan, he said.
As part of the plan, the city will seek to reclaim $239 million in overpayments to retirees, Bennett told the judge. Under the deal with the city’s pension systems, the two sides agreed to cap the amount overpaid retirees must repay at 20 percent of what they received.
Rhodes earlier yesterday ordered Detroit and its suburbs to work with a federal mediator in talks on a proposed regional water authority. Oakland and Macomb counties, customers of the city’s water and sewer department, opposed mediation while Wayne County, also a customer, asked the judge to order it.
The parties broke off negotiations earlier this year. Orr wants to lease the city’s water and sewer department to the new regional authority, a plan suburban leaders have resisted.
“If we do not take advantage of this unique opportunity, the opportunity will in all likelihood be lost forever,” Rhodes said.
Detroit entered bankruptcy in July, saying it couldn’t meet financial obligations and provide essential services. Since then, the city and creditors including bond insurers, public pension systems and unions have negotiated over cuts.
Under a proposal announced April 15, Orr agreed to pay retired city police officers and firefighters their full monthly pensions instead of asking them to accept a 6 percent cut.
Hours later, the pension system for general employees, such as city hall clerks and street workers, said it, too, had settled with Orr. Those workers’ pensions would fall by 4.5 percent instead of 26 percent, according to a person familiar with the talks.
Those accords followed an agreement last week that would pay investors who hold unlimited general obligation bonds 74 percent of what they are owed. Holders of limited GO bonds would get only 15 percent under Orr’s debt-adjustment plan.
State political leaders and a group of foundations have promised to give the city $816 million to bolster its two underfunded pensions, but only if it can win support from employees and shield the city-owned artwork housed at the Detroit Institute of Arts from being sold to pay creditors.
About 30,000 retired city workers and current employees will be asked to vote on the deal. To lock in the money, a majority of those voting in each employee group must approve the city’s plan, and that majority must hold two-thirds of the claims of those voting.
Should enough retirees reject the plan, general workers would see their pension cut by about one-third and police and firefighters by 14 percent.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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