By Alan Pyke, Think Progress, January 16, 2014
A judge rejected Detroit’s second attempt to resolve one key piece of its unpayable debts on Thursday, saying that a renegotiated deal with two Wall Street banks was still “just too much money.”
Saying that his court “will not participate [in] or perpetuate hasty and imprudent financial decision-making,” Federal Bankruptcy Judge Steven Rhodes denied the city’s proposal to cancel out debt contracts worth $300 million by paying a total of $165 million to Bank of America and the Swiss bank UBS. The decision may lead the city to sue two of the banks that helped put it into a bankruptcy that threatens to leave retired city workers destitute — a suit the judge thinks the city is “reasonably likely” to win.
While the $300 million debt involved in Thursday’s decision is a tiny fraction of the city’s overall debt burden, the specifics of the debts involved here make this deal central to emergency manager Kevyn Orr’s plans for bringing Detroit out of bankruptcy. They come from a deal made by corrupt, jailed ex-Mayor Kwame Kilpatrick (D). Kilpatrick entered into risky deals that went bad, and because Kilpatrick used revenue from the city’s casinos as collateral for the loans, the banks have been able to keep Detroit from making use of casino money throughout the bankruptcy proceedings. A deal to resolve the interest rate swaps with UBS and Bank of America would bring that casino cash back into city hands, potentially financing much-needed quality-of-life improvements for city residents.
Orr first tried to pay the banks roughly 80 cents on the dollar to clear the debts. When Rhodes rejected that deal, Orr’s team came back with a revised proposal to pay 60 cents on the dollar for the debts. The same group of decision makers has proposed paying the city’s retired workers less than 20 cents on the dollar of what they are owed in pensions and health care benefits. Retirees told ThinkProgress that the health care cuts Orr proposes would leave some of them choosing between food and prescription medications, while others have such serious medical needs that the cuts could be fatal.
The disparity between how Orr wishes to treat banks and retirees is even more jarring considering that banks bear much more of the blame for the city’s financial troubles than retirees. Detroit pensions are modest compared to similar cities’ public worker contracts, and experts have accused Orr of using “pension voodoo” to exaggerate the funding gap in the pensions by a factor of five. But the bad financial deals Wall Street sold to the city soaked up so much of its operating revenue that bankruptcy was the only recourse, according to financial exert Wallace Turbeville.