Ex-Michigan Treasurer skeptical of Detroit pre-bankruptcy deal

Reuters

By Joseph Lichterman

DETROIT, Nov 5 (Reuters) - Former Michigan Treasurer AndyDillon said on Tuesday that he was "very skeptical" that Detroitwould be able to cut an out-of-court deal with its creditors toavoid bankruptcy after reviewing the city's June 14 report thatsaid unsecured creditors would only receive pennies on thedollar.

Dillon, who resigned last month, testified on the seventhday of a trial to determine whether Detroit is eligible toreorganize its finances under bankruptcy protection.

"What troubled me most was when they put together the 10-year plan," Dillon said. "The recovery for the unsecuredcreditors was so low, I didn't know how anyone could practicablycut a deal and walk out of the settlement room."

The former treasurer was called to the witness stand under asubpoena as Detroit retirees, unions and pension funds try toblock the city from receiving court protection.

He is expected back on the stand when the trial before U.S.Bankruptcy Judge Steven Rhodes continues on Thursday.

Dillon played a key role in the lead up to Detroit's July 18bankruptcy filing by serving on review teams that scrutinizedthe city's finances.

In a July 9 email to Michigan Governor Rick Snyder that wascited in court on Tuesday, Dillon wrote that there were"creative options" for Detroit's public pension shortfall, buthe testified on Tuesday that he did not pursue any of thosesolutions because the pension deficit was "relevant but not adriving factor" behind the city's trip to U.S. Bankruptcy Court.

Detroit has $18.5 billion in debt and other obligations,which the city and state say includes a $3.5 billion unfundedpension liability, a figure that is disputed by bankruptcyopponents in the case. The opponents, who include the city'slabor unions, retirees and pension funds, are trying to provethat Detroit officials failed to try to negotiate a deal withthem and other creditors ahead of the July 18 bankruptcy filing.

To be eligible for Chapter 9 municipal bankruptcy, Detroitmust prove that it is insolvent, that it negotiated in goodfaith with its creditors or that there were too many creditorsto make negotiations feasible.

Detroit Emergency Manager Kevyn Orr, in a June 7 email alsocited in court, wrote that "a significant reduction in alreadyaccrued (pension) benefits will be required" for the city tosettle its unsecured liabilities.

"It appears this may only be possible in a Chapter 9proceeding," Orr added.

'LOOKS PREMEDITATED'

Lawyers for bankruptcy opponents introduced othercorrespondence in court in an attempt to show that bankruptcywas a foregone conclusion for the cash-strapped city.

Detroit's bankruptcy filing looked calculated, Dillon wrotein a July 10 email in which he also said that the city needed tobetter illustrate that it had done all it could have done out ofcourt to avert the filing.

"I don't think we are making the case why we are giving upso soon to reach an out of court settlement," Dillon wroteregarding a draft of the July 16 letter Orr sent Snyderrequesting authorization to file for bankruptcy. "Lookspremeditated."

Earlier on Tuesday, Michael Nicholson, general counsel tothe United Auto Workers, testified that the union, whichrepresents some city workers, offered to negotiate a reductionin retiree healthcare benefits with the city prior to itsbankruptcy filing.

City attorneys countered that Detroit did not have enoughtime to negotiate the type of deal that Nicholson suggested.

AFFORDABLE CARE ACT DELAY

Meanwhile, Detroit will delay its plan to move retireehealthcare onto the Affordable Care Act exchanges because ofproblems that are plaguing the roll-out of the online insurancemarketplaces, an attorney representing the city said in court onTuesday.

Detroit planned to provide all city retirees who are noteligible for Medicare with a stipend to purchase health coverageon the Affordable Care Act to take effect on Jan. 1, saidHeather Lennox, the city lawyer. Instead, Detroit will delay theplan a month, extending the current coverage through Jan. 31.

Orr announced changes to current and retiree healthcareplans last month. Detroit has $5.7 billion in liabilities forhealthcare and other retiree benefits, which accounts for abouthalf of the city's $11.9 billion in unsecured debt.

City retirees and Detroit's largest union filed a complaintlast month to stop Detroit from slashing retiree healthbenefits. Detroit asked Rhodes to delay a hearing on the matter,but the judge declined the city's request and could hold ahearing on the issue as early as Friday.

"There is, I think it's fair to say, enough confusioncreated by the roll out of the Affordable Care Act at this pointin time that to add to it or compound it in the way the cityproposes here is really not necessary and not fair to theretirees," Rhodes said Tuesday as he denied the city's request.

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