Detroit —The City Council on Monday voted unanimously to reject a $350 million loan for bankruptcy financing secured by Emergency Manager Kevyn Orr.
Orr announced earlier this month the city secured a loan with Barclays to pay off a pension related-debt and finance improvement of government services while Detroit is in bankruptcy.
The state’s emergency manager law allows the City Council to accept or reject the deal. The six-member council has seven days to propose an alternative to the state’s local emergency loan board that would reach the same financial result as Orr’s agreement or better.
It didn’t appear Monday the council would offer an alternative. Instead, it will let bankruptcy court proceedings play out. U.S. Bankruptcy Judge Steven Rhodes will have the ultimate say on the deal.
“The reality is, it seems to me, that one could make the argument that an alternative plan is not to act on this at all, but rather to fight on this issue in bankruptcy court,” Councilman Kenneth Cockrel Jr. said, questioning the timing of Orr’s deal.
“Why do this now, before we go into court on Wednesday?” Cockrel added, referring to the upcoming bankruptcy eligibility trial. “The emergency manager hasn’t explained why the agreement should be approved before a federal bankruptcy judge has decided Detroit qualifies for bankruptcy.”
Orr’s deal is intended to end an interest rate swap agreement with UBS AG and Bank of America that was tied to $1.44 billion the city borrowed in 2005-06 to shore up its pension fund. Orr’s proposal to give UBS and Bank of America between 72 and 80 cents on the dollar in an early bankruptcy settlement has been opposed by retirees, the city’s pension funds and pension debt insurers vying to be repaid money the city owes them.
Detroit listed $18.5 billion in debts and liabilities in its bankruptcy case.
Orr’s spokesman, Bill Nowling, said the council’s failure to support the agreement was disappointing.
“It’s pretty clear we needed this financing to get out of the swaps deal,” he said.
Nowling said the agreement would result in a lower interest rate for debt, free up casino revenue and provide cash to improve city services.
“Any reasonable person would look at that and say it’s a great deal for the city,” Nowling said. “It’s disappointing when there is no support for improving the city from a financial and service delivery standpoint.”
Under the current swaps agreement, Nowling said, the city does not get any casino revenue until after the banks take their cut. Under Orr’s agreement, the casino money stays with the city and is used as a security on the loan, but it’s not used to pay the loan.
The funds — about $120 million — could instead be invested in technology infrastructure at City Hall and improving city services for residents and businesses. The casino and income tax revenues would only be used if the city is unable to pay, he said.