UPDATE 1-Michigan House passes bill package for bankrupt Detroit

Thu May 22, 2014 5:07pm EDT

(Recasts; adds background, details on bills, statement from Detroit emergency manager, House debate on bills)

May 22 (Reuters) - Detroit's plan to adjust its debts and exit bankruptcy as soon as this fall got a boost on Thursday when the Michigan House of Representatives approved a package of bills that includes state money to aid the city's retirees.

Under the so-called grand bargain in Detroit's debt adjustment plan, Michigan's nearly $195 million lump sum contribution, along with $466 million pledged over 20 years by philanthropic foundations and the Detroit Institute of Arts would be used to ease pension cuts for city retirees. The deal would also protect city art works from being sold to raise money to pay city creditors and includes commitments from two unions to raise money for retiree healthcare costs.

All of the contributions are contingent on each other and on members of Detroit's two retirement systems agreeing to accept minimal cuts to their pensions to help the cash-strapped city deal with $18 billion of debt and other obligations.

The legislation approved by the Republican-controlled House would allow Michigan to take the money out of its rainy day fund. The money would be paid back to the fund over time from Michigan's share of a national settlement with U.S. tobacco companies.

The bills also create a nine-member oversight panel that would stay active until Detroit meets certain financial thresholds and require the city hire a qualified chief financial officer and submit four-year financial plans. The 11 bills now head to the Republican-controlled Senate.

Kevyn Orr, Detroit's state-appointed emergency manager, said the House's action brought the city "a crucial step closer" to protecting pensions and exiting the biggest municipal bankruptcy in U.S. history.

"The state of Michigan's willingness to participate in a negotiated settlement that will limit financial impact to the city's two pension funds and protect the city-owned treasures at the Detroit Institute of Arts is a critical component to the city's proposed plan of adjustment," Orr said in a statement.

Ahead of the voting, some Republican and Democratic lawmakers said unless the state participates in the settlement, Michigan could be hit with big legal and social service costs in the wake of larger pension reductions.

But State Representative David Nathan, a Detroit Democrat, argued that the legislation "tramples on democracy."

"I do not trust this will work out for the betterment of my community," he said.

A special, bipartisan House committee initially approved the bills on Wednesday.

U.S. Bankruptcy Judge Steven Rhodes has set July 24 for the start of a hearing on Detroit's debt adjustment plan to determine if it is fair and feasible. (Reporting by Karen Pierog; Editing by Meredith Mazzilli and Eric Walsh)

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