Detroit’s offer to replace a $3.5 billion unfunded pension liability with a $2 billion note “was not a serious proposal,” according to a Greenhill & Co. (GHL:US) adviser hired by a city employee retirement fund.
Greenhill & Co.’s Bradley A. Robins today told the judge who will decide whether Detroit can remain under bankruptcy court protection that he couldn’t respond to the city’s pension proposal because it was too vague and because the city didn’t give him and other financial advisers for creditors details of its assets.
“I viewed it more as a shot across the bow,” said Robins, who worked as an adviser in the bankruptcies of American Airlines and United Airlines (UAL:US), where pensions were also threatened.
“The note itself I thought was not a serious proposal” because it had only a 1.5 percent interest rate and no maturity date, Robins said. The note would be shared with other unsecured creditors, including investors owed more than $1.4 billion for pension obligation bonds.
Municipal unions and retiree groups, including the main pension fund for city employees, want U.S. Bankruptcy Judge Steven Rhodes to throw Detroit out of bankruptcy, where it is protected from lawsuits and other actions that may disrupt its restructuring efforts.
The unions and retirees claim Detroit’s emergency manager, Kevyn Orr, didn’t try to negotiate with creditors because he and state officials were determined to use bankruptcy to cut pensions that would otherwise be protected by the state constitution.
After Robins and two other witnesses testified, objectors completed presenting their case against bankruptcy. Rhodes scheduled closing arguments, which may last more than four hours, for tomorrow.
The trial has lasted eight days and featured testimony from Orr, Governor Rick Snyder and former Michigan treasurer Andy Dillon, all of whom defended the bankruptcy as necessary.
About a month before the July 18 filing, Orr proposed canceling the unfunded liability (9845MF:US) owed to the city’s two pension funds and the unsecured pension bonds held by investors.
Snyder, a Republican, who nominated Orr, a corporate lawyer and former Democratic political appointee, both testified that the proposal was necessary because the city doesn’t have enough money to cover the debt.
Dillon, a Democrat appointed treasurer by Snyder, testified that Michigan lawmakers wouldn’t be willing to provide any money to cover the cost of Detroit’s pension system or retiree health care. Dillon is a former speaker of the Michigan House of Representatives.
To remain in bankruptcy, the city must convince Rhodes that it’s insolvent, that it’s entitled under state law to file for bankruptcy, that it tried to negotiate with creditors or was unable to do so, and that it intends to file a plan to adjust its debts.
Union and retiree lawyers argued Detroit fails those tests because it didn’t try to negotiate and because Snyder violated Michigan’s constitutional ban on cutting pensions when he authorized the bankruptcy.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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