The city’s lawsuit over what’s been termed a “disastrous deal” in how it funded pensions in 2005 and 2006 — a description levied with the benefit of 20-20 hindsight — is the subject of a court-ordered mediation session today.
Chief U.S. District Judge Gerald Rosen, also the head mediator in the city’s bankruptcy case, issued an order to the city, several insurers and the banks that financed the “Certificates of Participation” (COPs) for the city’s two pension funds. Attorneys are to appear at noon today to discuss the deal, which provided about $1.8 billion for Detroit’s two pension funds under terms that later became unaffordable for the city.
The city, in a lawsuit filed in January by Emergency Manager Kevyn Orr, calls the COPs deal illegal.
As part of the city’s bankruptcy case, an agreement was reached earlier this year with UBS and Bank of American Merrill Lynch, the banks that funded an interest-rate restructuring related to the COPs. Bankruptcy Judge Steven Rhodes twice rejected settlements of $230 million and $165 million before approving the $85 million in March for the city to settle the debt, known as the interest-rate “swaps” deal. Detroit incurred the debt in 2009 when it pledged casino taxes as collateral to avoid defaulting on pension debt payments. The city ended up locking itself into high interest rates on bonds, and the deal became too costly when interest rates plunged.
Judge Rosen is considered the chief architect of the “grand bargain,” the “swaps settlement” and has led talks between the city and employee groups in reaching settlements in the bankruptcy case. Judge Rhodes has repeatedly encouraged attorneys for the city and its creditors to keep discussing settlements in advance of the Aug. 14 bankruptcy trial.
Here’s Reuters’ story on the mediation session today.