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Ex-Michigan Treasurer skeptical of Detroit pre-bankruptcy deal

By Joseph Lichterman

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

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

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

The former treasurer was called to the witness stand under a subpoena as Detroit retirees, unions and pension funds try to block 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 18 bankruptcy filing by serving on review teams that scrutinized the city's finances.

In a July 9 email to Michigan Governor Rick Snyder that was cited in court on Tuesday, Dillon wrote that there were "creative options" for Detroit's public pension shortfall, but he testified on Tuesday that he did not pursue any of those solutions because the pension deficit was "relevant but not a driving 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 unfunded pension liability, a figure that is disputed by bankruptcy opponents in the case. The opponents, who include the city's labor unions, retirees and pension funds, are trying to prove that Detroit officials failed to try to negotiate a deal with them and other creditors ahead of the July 18 bankruptcy filing.

To be eligible for Chapter 9 municipal bankruptcy, Detroit must prove that it is insolvent, that it negotiated in good faith with its creditors or that there were too many creditors to make negotiations feasible.

Detroit Emergency Manager Kevyn Orr, in a June 7 email also cited in court, wrote that "a significant reduction in already accrued (pension) benefits will be required" for the city to settle its unsecured liabilities.

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


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

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

"I don't think we are making the case why we are giving up so soon to reach an out of court settlement," Dillon wrote regarding a draft of the July 16 letter Orr sent Snyder requesting authorization to file for bankruptcy. "Looks premeditated."

Earlier on Tuesday, Michael Nicholson, general counsel to the United Auto Workers, testified that the union, which represents some city workers, offered to negotiate a reduction in retiree healthcare benefits with the city prior to its bankruptcy filing.

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


Meanwhile, Detroit will delay its plan to move retiree healthcare onto the Affordable Care Act exchanges because of problems that are plaguing the roll-out of the online insurance marketplaces, an attorney representing the city said in court on Tuesday.

Detroit planned to provide all city retirees who are not eligible for Medicare with a stipend to purchase health coverage on the Affordable Care Act to take effect on Jan. 1, said Heather Lennox, the city lawyer. Instead, Detroit will delay the plan a month, extending the current coverage through Jan. 31.

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

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

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