The judge overseeing Detroit’s record $18 billion municipal bankruptcy asked one of the city’s lawyers for a description of its debt-reduction plan that public workers facing pension cuts can understand.
U.S. Bankruptcy Judge Steven Rhodes yesterday told Heather Lennox of Jones Day, the law firm representing Detroit, that he wants a plain-English document for 32,000 current and retired public employees to use in deciding whether to vote to reduce some of their retirement benefits by as much as 26 percent.
That vote will determine whether private foundations and the state of Michigan will put more than $800 million into Detroit’s underfunded pension system, a key to resolving the city’s bankruptcy.
Lennox previously worked on the liquidation of Hostess Brands Inc., another case in which labor issues played a pivotal role. She said after the hearing yesterday that she’ll give Rhodes her plain-language explanation within two weeks.
“She knows all of the bankruptcy details,” said Thomas F. Cullen Jr., a colleague at Jones Day, where both are partners. “She’s also the closest lawyer we have to a real person.”
Two groups of current and future retirees will be asked to vote on the plan. To get a higher payout, a majority of those voting in each group must approve the city’s plan, and that majority must also hold two-thirds of the claims of all those voting.
Detroit filed for bankruptcy in July, saying it couldn’t meet its financial obligations and still provide necessary services. The city has since been in negotiations over cuts with municipal unions, retired workers and bond insurers.
Under a plan submitted to the court in February and revised last month, pensions for police and firefighters would be cut about 6 percent if they vote for the plan, 14 percent if they don’t. Pensions for other city workers would be cut by about 26 percent if they vote yes and by about one-third if they don’t.
A hearing to seek approval of the document creditors would rely on in deciding their vote, known as the disclosure statement, was pushed back yesterday to April 17 from April 14 to give the parties more time to prepare. The plan itself would go up for final approval at a trial set to begin in July.
The judge yesterday also approved a $120 million loan to buy emergency vehicles and remediate blight in the city of about 700,000 people.
Detroit is set to return to court today to seek approval of an $85 million deal it reached with UBS AG (UBSN) and Bank of America Corp. (BAC:US) to end interest-rate swaps that would otherwise threaten the city’s most reliable source of cash: casino taxes.
In January, Rhodes rejected as too costly a proposal to pay $165 million to end the swaps. That was down from a deal reached days before the city’s bankruptcy filing to pay $230 million.
The swaps, tied to pension obligation bonds issued in 2005 and 2006, were designed to protect against rising interest rates by requiring the banks to pay the city if rates rose above a certain level. Instead, rates fell, and the swaps have cost taxpayers about $200 million since 2009.
Creditors including Syncora Guarantee Inc., which insures some of the city’s debt, oppose the swaps settlement and say Detroit should fight to have the contracts canceled.
From the outset, Rhodes has been mindful of the stake that current and former city workers have in the outcome of the bankruptcy. Weeks after the case began, the judge, at the request of the city, authorized a committee of retirees to be formed to negotiate on behalf of pensioners.
At the end of yesterday’s hearing, the judge told Lennox he was concerned about the way complicated matters in the case were being portrayed in the media. He said the city should reach out to reporters to help them correct any errors about how retirees are being treated.
“It is very difficult to make lawyers think like real people,” Cullen, who was also at the hearing, told the judge.
Lennox, who got her law degree from Georgetown University in 1992, said she was chosen by her firm to draft a notice that would go to retirees along with a copy of the disclosure statement.
“I’m the closest to the pensions issue,” she said in an interview.
At the beginning of Detroit’s bankruptcy in July, Lennox was the public face of the city’s legal team, appearing before Rhodes and arguing successfully for a halt to a number of lawsuits that had threatened to disrupt the case.
Last year, she led the team that liquidated Hostess Brands after the company was unable to cut a deal with striking workers for concessions.
While working on the case, she faced Sharon Levine, who represented one of the pension funds that covered Hostess retirees. Levine, a partner at Lowenstein Sandler LLP, now represents Detroit’s biggest general-employee’s union, which is seeking to get the bankruptcy thrown out of court.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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