Source: USA TODAY
DETROIT — The city of Detroit hopes to save as much as $3 million per month by paying off a disastrous pension debt deal with new bankruptcy financing — but the route to getting the deal approved took an unexpected turn Tuesday when Judge Steven Rhodes questioned a state oversight board’s role in the process.
Rhodes ordered the city’s bankruptcy attorneys to explain the role of Michigan’s Emergency Loan Board in approving the deal, when it plans to act and who serves on it. He said he’s not prepared to sign off unless the city can explain why the board hasn’t taken action on the proposal.
“I want a report tomorrow morning,” Rhodes said Tuesday.
His comments came on the first day of a trial to consider the city’s request to borrow up to $350 million from London-based Barclays and to pay off an interest-rate deal from 2005 called “swaps.”
Rhodes will decide whether the city can borrow the cash and implement the swaps settlement. Rejecting the deals would delay emergency manager Kevyn Orr’s plan to exit bankruptcy by September.
The judge seemed agitated after the city’s lawyers could not identify the three members of the Emergency Loan Board or adequately explain their role in approving the deal, which the city has described as crucial to improving its finances and services.
“If there’s any chance they’re not going to approve this, we’re wasting three days of trial with really expensive lawyers,” Rhodes said.
After the hearing, Orr spokesman Bill Nowling said it wasn’t immediately clear that the loan board’s approval for the swaps deal is required. But he said the state treasurer’s office has been kept up to date on the matter and had signed off on it.
About a dozen creditors have objected, arguing that the city should not proceed with its plans to pay Bank of America Merrill Lynch and UBS about $230 million to exit the swaps, which cost about $45 million a year.
Getting rid of the swaps would free up the city’s casino tax revenue, which amounts to about $170 million and was pledged as collateral on the swaps in 2009 to avoid immediate payment of up to $400 million.
The banks would get about 75% to 82% of what they’re owed under their secured swaps contracts.
The city said it wants to use the Barclays cash to get rid of the swaps and invest about $120 million in city services, such as police and fire and blight removal.
The Detroit City Council, which was rendered mostly powerless after Michigan Gov. Rick Snyder appointed Orr as emergency manager, had voted to reject the financing deal in a largely symbolic move. The City Council did not offer an alternative to the deal, which the law requires for the state loan board to consider overruling the council’s vote. Since there was no alternative, the financing deal stands with Orr’s approval.
Still, Rhodes wanted to know why the board is waiting to approve the Barclays financing.
“We have every expectation the Emergency Loan Board will approve the transaction,” said Brad Erens, an attorney for the city.
Contributing: Matt Helms of the Free Press