DETROIT — A judge overseeing Detroit’s bankruptcy again rejected a deal today to end a crippling 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 Chapter 9 in the largest public filing in U.S. history.
Judge Steven Rhodes turned down a $169 million compromise, saying “it’s just too much money.” He had rejected a $230 million deal on the same grounds in December.
Meanwhile, in Lansing, Gov. Rick Snyder met with state lawmakers to discuss the possibility of putting money aside to shore up Detroit’s pension plans and prevent the sale of city-owned art, days after foundations committed $330 million to the effort.
In 2009, Detroit pledged a critical revenue source, casino taxes, as collateral to avoid defaulting on pension debt payments. The city locked itself into high interest rates on bonds with UBS and Bank of America, but the deal became extremely costly when interest rates plunged during the recession. Rhodes called it “disastrous.”
Nonetheless, the judge turned thumbs down on the latest deal to unwind the transaction. He didn’t offer his own number, at least not publicly, but encouraged all sides to keep talking. He then cleared the courtroom to meet privately with lawyers.
“It’s higher than the highest reasonable number. ... By any rational analysis, it’s not close,” Rhodes said moments earlier.
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 $18 billion.
Orr didn’t offer much reaction to Rhodes’ decision, although he was grateful to get the judge’s OK for a $120 million loan for city services.
“We will continue to work toward a resolution of the pension swaps,” he said.
In the capital, Snyder, a Republican, spoke with senators behind closed doors about Detroit’s pensions. He may soon ask the GOP-controlled Legislature to match the foundations’ contribution over a number of years, possibly in his February budget proposal. Senate Majority Leader Randy Richardville confirmed the talks but said no request has been made to legislators, nor have they made any commitments.
Richardville said he was “cautiously optimistic” that a solution “will come forth sometime in the near future.”
“Detroit is hugely important to everybody in this state,” he said.
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 $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.
The Community Foundation for Southeast Michigan has been collecting money and pledges from people outside Michigan. Foundation President Mariam Noland said help from the state would be important.
“Having as much as money as possible to relieve the potential cuts on the pensions is ... great news,” she said.
The judge’s 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 $169 million deal had included $4 million in other 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.