CORRECTED-Detroit proposes to pay pensions more than bondholders-report

Fri Jan 31, 2014 12:20pm EST

(Corrects spelling of Kevyn Orr's first name in 4th paragraph)

NEW YORK Jan 31 (Reuters) - Detroit wants to pay the city's pension funds more than bankers and bondholders and to treat complex interest-rate debt it owes to two large Wall Street banks as unsecured debt, according to a report by the Detroit Free Press.

The proposals are part of the city's plan of adjustment in its historic bankruptcy case. Detroit needs to reduce some $18 billion in debt and long-term liabilities.

The paper quoted a person familiar with the draft as saying the city proposed to pay pension funds around 25 cents on the dollar, compared with about 22 cents for other unsecured creditors, including bondholders whose repayments are not tied to specific revenue streams.

The city's Emergency Manager Kevyn Orr presented the proposed debt adjustment plan, required as part of a Chapter 9 municipal bankruptcy, earlier this week and is still at odds with pension funds about how large a cut they should take.

Detroit is still negotiating with UBS and Bank of America Merrill Lynch on a lower pay-off of a $165 billion interest rates swaps deal, but Judge Steven Rhodes has twice rejected proposals and has questioned the legality of the deal.

The proposal also calls for leasing the city's water department for 40 years and setting up a health care trust to manage insurance benefits for retirees, the paper reported. (Reporting By Steven C. Johnson; Editing by Chizu Nomiyama)