%1

Two federal judges in Detroit’s bankruptcy case have refused drawn-out battles in favor of quick rulings and aggressive mediation that’s speeding the chapter 9 process along, according to a commentary yesterday in the Detroit Free Press. Much of the action has been happening in the private chambers of Chief U.S. District Judge Gerald Rosen, where he convenes confidential mediation sessions producing rapid-fire results. Mediation breakthroughs — most notably lining up about $800 million of private and state money for a pension rescue fund — have shifted Detroit’s historic bankruptcy case into high gear with a quick resolution potentially in sight that was unthinkable just a few months ago.

Detroit on Friday filed a lawsuit in U.S. bankruptcy court seeking to invalidate $1.44 billion of debt sold to fund public worker pensions — a move that also could void the ill-fated interest-rate swaps contracts that were a factor leading Detroit into bankruptcy, Reuters reported. The lawsuit contends the city and its retirement systems violated Michigan law when they set up "sham" service corporations and funding trusts to facilitate the debt sales in 2005 and 2006. All other contracts or obligations connected to the debt are also void, the lawsuit claims. Detroit in its lawsuit said that the pension debt was "nothing more" than a borrowing by the city, and it violated borrowing limits imposed on Detroit by the state of Michigan. In the suit, Detroit asked Bankruptcy Judge Steven Rhodes to issue a judgment declaring the city is not obligated to continue making payments on the so-called pension certificates of participation (COPs). The COPs were issued during the term of former Mayor Kwame Kilpatrick, now in prison on federal corruption charges.

Detroit officials gave Bank of America Corp. and UBS AG until today to say how much they would accept to cancel interest-rate swaps that cost city taxpayers about $4 million a month or face a possible lawsuit, Bloomberg News reported today. The city and the banks have been trying to negotiate a new deal since a federal judge rejected a proposal to pay the banks $165 million to end the swaps. Should the banks make a low enough offer today, the city will keep talking through the weekend in hopes of presenting a new deal to Bankruptcy Judge Steven Rhodes. Without a deal, the city will consider taking legal action to have the swaps declared illegal and to prevent the banks from seizing about $4.2 million in casino taxes held in a custodial account, the person said. The city has paid more than $200 million on the swaps since 2009. Judge Rhodes this month rejected the $165 million proposal, which was a reduction from an earlier agreement to pay $230 million, as “too high a price.” He advised Detroit to seek better terms.

Detroit’s emergency financial manager may file a proposed debt-adjustment plan in federal court in about two weeks, an action that would start the final phase in the city’s record $18 billion municipal bankruptcy, Bloomberg News reported today. The manager, Kevyn Orr, has given a copy of the plan to creditors, his spokesman, Bill Nowling, said yesterday. Creditors will have a chance to vote on the proposal once it’s filed in the bankruptcy court and Bankruptcy Judge Steven Rhodes determines it gives enough information. The plan reflects details already presented to creditors who have been negotiating with the city since it filed for bankruptcy in July, Orr said. Judge Rhodes had told the city he wanted it to file a plan by March 1.

The Detroit Institute of Arts (DIA) has pledged to raise $100 million for the federally mediated rescue fund to shore up municipal pensions, prevent the forced sale of any of the museum’s irreplaceable masterpieces and spin off the city-owned museum to an independent nonprofit, the Detroit Free Press reported today. The commitment was announced in a statement by Chief U.S. District Judge Gerald Rosen, which was followed a short while later by a statement from the DIA, which said that its board of directors approved a commitment by the DIA to raise $100 million from corporate and individual donors toward these efforts. According to the DIA’s statement, the City of Detroit will transfer to the DIA “free and clear legal title to the museum building, the art collection and all related assets.”

Foundations seeking to protect Detroit's public pensions and its art museum in the city's bankruptcy process raised their pledge total to $370 million on Tuesday with the addition of a $40 million commitment from the W.K. Kellogg Foundation, Reuters reported yesterday. A group of U.S. philanthropic foundations announced earlier this month that they were prepared to step in with funding assistance to help preserve the Detroit Institute of Arts' collection and assist in shoring up the cash-strapped city's employee pensions. Michigan Governor Rick Snyder followed up that commitment with a plan he unveiled last week to tap up to $350 million in state funds over 20 years for Detroit retirees.

With Detroit's revenue from property taxes expected to come in at only $118.4 million in the current fiscal year, Detroit Mayor Mike Duggan announced a plan yesterday to lower property assessments and taxes this summer, with an eye toward boosting home ownership and, ultimately, tax collections, Reuters reported yesterday. Property taxes for city homeowners would drop by 5 percent to 20 percent following a realignment of the assessment system, according to a statement from Duggan's office. A review of current assessments and actual home sales between Oct. 1, 2011 and Sept. 30, 2013 found some areas of the city were over assessed by at least 20 percent, according to the mayor's statement.

One of the three main credit rating agencies calls Michigan Governor Rick Snyder’s proposal to use $350 million to defray Detroit municipal pension losses “troubling” and could damage the state’s image with investors, the Detroit News reported today. Fitch Ratings said in a report yesterday that it “believes that the Michigan governor’s recent proposal to contribute $350 million towards Detroit’s unfunded pension liabilities demonstrates continued weak support for bondholder security and repayment stemming from Detroit’s bankruptcy. In Fitch’s opinion, action that suggests pensions’ claim on limited resources should be given priority to that of bondholders could establish a troubling precedent, at least in Michigan and perhaps beyond.” Snyder said last week that his administration is considering whether to borrow $350 million to pump into Detroit’s pension funds or set aside $17.5 million in annual payments for the next 20 years from the state’s tobacco lawsuit settlement fund.

Michigan Attorney General Bill Schuette is urging a federal appeals court to immediately jump into Detroit's bankruptcy and consider whether pensions can be cut, the Associated Press reported yesterday. Schuette said in a court filing yesterday that he backs the bankruptcy case but says he strongly believes reducing pensions would violate the Michigan Constitution. While the case is being appealed, steps are being taken outside the courtroom to come up with additional funding for Detroit’s debt. Several foundations, for instance, have pledged more than $300 million to patch up pension funds and prevent the sale of artwork from the Detroit Institute of Arts. Gov. Rick Snyder is trying to win approval for millions more in state aid.

Michigan Governor Rick Snyder yesterday called for the U.S. government to set aside 50,000 special visas over the next five years to attract highly skilled immigrants to live and work in the bankrupt city of Detroit, Reuters reported yesterday. The proposal by the Republican governor would have to be implemented by the federal government at a time when immigration reform is one of the most contentious political issues. Snyder hopes that a pool of talented workers would encourage companies to bring new jobs by relocating to the financially struggling city, which has seen its population decline to about 700,000 from a peak of 1.8 million in 1950. The EB-2 visas would be aimed at individuals with advanced degrees and exceptional skills in fields such as the auto industry, information technology, healthcare and life sciences, Snyder said.