City Pension Funds Continue to Cause Stir in Detroit Bankruptcy

City Pension Funds Continue to Cause Stir in Detroit Bankruptcy

It hasn’t been easy going for Detroit, and its bankruptcy case has met numerous headwinds – many of which result from positions taken by the city’s pension funds. Now, the city has struck back, filing a lawsuit in bankruptcy court to invalidate $1.44 billion in debt sold to fund public worker pensions.

Detroit has asked Judge Steven Rhodes to rule that it is no longer obligated to make payments on the pension certificates of participation, which were issued when Kwame Kilpatrick was mayor. Mr. Kilpatrick is now in federal prison for corruption.

“This deal was bad for the city from its onset despite reassurances it would adequately resolve the city’s pension issues,” Kevyn Orr, Detroit’s state-appointed emergency manager, said in a statement. “We have tried[,] without success, to negotiate a resolution to this dispute and to allow the city and its taxpayers to move forward and unwind these illegal transaction.”

It could be worse for the city’s pension funds though. Under the current proposal for Detroit’s bankruptcy plan of adjustment, the pension claimants are expected to receive a larger distribution on their claims than will the bankers and bondholders. Specifically, Detroit’s plan would provide more money from the city to pension funds than to two large Wall Street Banks – UBS and Bank of America Merrill Lynch. Unfortunately, Judge Rhodes has already turned down two previous proposals to lower the pay-off on the funds owed to these banks.

More to follow, as this battle develops.