DETROIT â€" Insurers of about $400 million of Detroit’s general-obligation bonds have agreed to settle their bankruptcy claims in a deal that would also help protect the city’s retired workers, federal mediators said on Wednesday.
Although the bonds represent a relatively narrow slice of Detroit’s $18 billion in outstanding debts, the deal could add momentum to the city’s efforts to resolve its bankruptcy in record time, by this fall. City and state officials are hoping to finish the case by then because the state law that puts Detroit under control of an emergency manager will expire then.
The new agreement calls for Detroit to honor the existing terms of about 78 percent of the affected bonds, according to one of the insurers, Assured Guaranty. Counting the payments skipped by Detroit since it declared bankruptcy last July, the overall recovery rate will be about 74 percent, the insurer said. The other insurers involved are the National Public Finance Guarantee Corporation and Ambac.
The remaining 26 percent of the scheduled debt service will be used to establish an “income stabilization fund†to keep retired city workers from falling below the federal poverty line. Detroit’s plan of adjustment calls for their pensions and retiree health benefits to be reduced because it does not have enough money set aside to pay the benefits they were promised.
Some retirees would be affected more adversely than others, and the mediators said the new fund was intended to help the most vulnerable ones.
The new settlement could shed light on how a particular type of general-obligation bonds could be treated in municipal bankruptcy, something of great interest to the municipal bond market as a whole. The bonds that are part of the deal are known as “unlimited tax general obligation bonds,†and the settlement would confirm that the bonds have a valid lien on property taxes that Detroit had pledged as security when it first issued them.
The settlement would also confirm that the pledged property taxes constitute “special revenues†under the United States Bankruptcy Code. Special revenues were designated in the 1980s as a type of bond security that would help distressed cities borrow, but the concept has not yet been subjected to a court challenge.
