July 16, 2014 / 8:20 PM / 4 years ago

Legal disputes over debt plan aired in Detroit bankruptcy case

DETROIT, July 16 (Reuters) - Detroit’s historic bankruptcy case on Wednesday moved on to legal issues underpinning the city’s debt adjustment plan, including locking in pension changes for 10 years.

The two days of arguments on legal disputes before U.S. Bankruptcy Judge Steven Rhodes are a prelude to a key hearing starting on Aug. 14 on whether the city’s plan to deal with $18 billion of debt and other obligations is fair and feasible.

Rhodes made no immediate rulings on Wednesday on legal issues, which also included whether the Michigan counties of Wayne, Macomb and Oakland have the right to object to the plan.

Christopher Legghio, attorney for the Detroit Fire Fighters Association, argued the plan would prevent collective bargaining between the city and its unions by removing pensions as a bargaining chip for a decade.

He added that the city was inappropriately giving the court a seat at the bargaining table.

“They are now asking you to decide the terms of a future collective bargaining agreement,” Legghio told Rhodes.

The judge raised the possibility that the pension changes were necessary for the city to implement its plan.

Heather Lennox, an attorney representing Detroit, said the 10-year lock on pensions was reasonable given the city’s precarious financial situation.

An unfunded pension liability pegged at $3.5 billion was a major factor contributing to Detroit’s filing of the biggest municipal bankruptcy in U.S. history in July 2013.

Under the plan, annual cost-of-living adjustments for public safety retirees would be cut by 55 percent, while direct pension payments would remain unchanged.

Detroit is relying on a so-called grand bargain that taps $466 million pledged by philanthropic foundations and the Detroit Institute of Arts and $195 million from the state of Michigan to ease pension cuts and protect artwork from being sold to pay city creditors.

Without that money, pension reductions, particularly for retired general city employees, would be bigger. As a result, Detroit’s two retirement systems and major unions, with the exception of the firefighters, have reached settlements.

Actual or pending settlements also removed or postponed some of the 14 legal issues on a list Rhodes drew up in early June.

Meanwhile, attorneys for the three counties argued their clients have the duty to represent the interests of their residents and businesses who pay for and receive services from Detroit’s water and sewer department. The counties want to object to the diversion under the plan of millions of dollars in department revenue for city pension payments - money they claim is needed for critical water and sewer system improvements.

Lennox contended the city had not defaulted on any related contracts with the counties, an event that would allow them to intervene. Letting the counties into the case outside of that could open the doors to the objections of millions of the city’s water and sewer rate payers, she added.

Lennox also said that water and sewer bondholders, who have standing in the case, have made similar objections. But Max Newman, an attorney for Wayne County, said bondholders had different interests than the counties.

The judge also heard legal disputes over the plan’s treatment of individual claims arising from property condemnations and the misconduct of city officials. (Reporting by Karen Pierog; Editing by Jonathan Oatis)

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