UPDATE 1-Detroit bankruptcy judge revives idea of regional water agency

Thu Apr 17, 2014 7:06pm EDT

(Recasts with judge's comments on post-bankruptcy oversight, need for support from mayor and city council, judge's ruling on objections, action by city's police and fire retirement system, appointment of additional mediators, background)

By Cherie Curry

DETROIT, April 17 (Reuters) - The federal judge overseeing Detroit's historic bankruptcy case has revived the idea of a regional water authority and also suggested the city may need court oversight after it emerges from bankruptcy.

U.S. Judge Steven Rhodes ordered the city and three counties to work with a court-appointed mediator to create a regional water authority. Detroit's emergency manager, Kevyn Orr, had previously disclosed his intent to abandon efforts to form a jointly controlled utility to serve Detroit and surrounding counties.

The potential plan for a court-appointed supervisor comes on top of existing oversight. Detroit already has a financial advisory board, and Orr and Michigan Governor Rick Snyder are mulling an oversight board similar to the one created after New York City's fiscal crisis decades ago.

"We have to think about what an appropriate role is for the U.S. Bankruptcy Court post confirmation," Rhodes said.

Rhodes also indicated he may select a single person who would answer to the court even after Detroit emerges from bankruptcy, saying it would be "efficient to have one person."

Rhodes said it would be important that the plan crafted by Orr and his team to adjust $18 billion of debt and other obligations and exit from the biggest municipal bankruptcy in U.S. history has the support of Detroit's mayor and city council.

Orr's appointment as emergency manager is scheduled to end in September.

At Thursday's court hearing, the judge dismissed most objections raised by dozens of creditors who claimed deficiencies and other problems in a key supporting document for the city's plan.

Rhodes let stand objections that Detroit's attorneys said the city would address on April 25 when it submits its next draft of the so-called disclosure statement. City attorneys said there had been progress in negotiations with key creditors.

On Thursday, the board of Detroit's Police and Fire Retirement System accepted a deal that would result in no pension cuts for public safety workers but would reduce cost of living adjustments (COLAs) to 1 percent.

The General Retirement System board on Wednesday accepted a deal for general city workers that calls for a 4.5 percent cut in pensions as well as the elimination of COLAs. Those deals would be on a ballot sent to Detroit's workers and retirees, who will be asked to vote on the city's debt adjustment plan.

Federal court mediators said on Tuesday that Detroit had reached its first settlement with a group representing retired city workers. And last week, the city won court approval for a crucial deal over interest rate swaps and reached a settlement with three bond insurance companies over the treatment of voter-approved general obligation bonds.

CITY AND COUNTIES TO MEDIATE WATER AGENCY

In directing Detroit and its neighboring counties to discuss formation of a Great Lakes Water Authority, Rhodes indicated he was seeking to take advantage of the bankruptcy process to bring the parties together.

"The court finds that such negotiations are in the best interest of the city and all of its customers, and that this bankruptcy case offers the parties a unique opportunity to negotiate a regional water authority," Rhodes stated in his written order.

Orr's proposal to lease the city's water and sewer departments to a regional authority for a hefty annual fee and using that money for unrelated purposes had drawn objections by officials in Macomb and Oakland counties, stalling previous talks.

Oakland County Executive L. Brooks Patterson said the county would participate in the newly ordered mediation and would insist on protections for suburban Detroit rate-payers.

"Any solution that may be found in mediation cannot merely divert funds from water and sewer customers to Detroit's general fund so the city can meet its obligations," he said in a statement. "Revenue from all rate-payers must remain in the water and sewer system to pay for critical upkeep and rehabilitation."

There was no immediate reaction to the judge's decision from the two other county executives.

Detroit had solicited entities interested in bidding to operate and manage the services and received 41 initial responses earlier this month.

U.S. Judge Sean Cox, who had presided over previous litigation involving the city's water and sewer department, was tapped to mediate the regional authority matter. The court also added U.S. Judge David Lawson to handle disputes involving U.S. constitutional matters in mediation.

At Thursday's hearing, attorneys for bond insurer Syncora Guarantee and the city's biggest labor union, and other creditors raised concerns over the newly revised disclosure statement Detroit filed with the court late on Wednesday, less than 24 hours before the hearing started.

Ryan Blaine Bennett, an attorney at Kirkland and Ellis who is representing bond insurer Syncora Guarantee Inc, cited due process concerns, and said creditors did not have enough time to review the revised document. (Reporting by Cherie Curry; Additional reporting by Karen Pierog in Chicago; Editing by Leslie Adler)