CHICAGO — Three days before a judge rules on Detroit's bankruptcy exit strategy, the city posted a proposed order that defends the plan as conforming to all key federal benchmarks, highlighting its legal justification for favoring pensioners over bondholders.

Detroit's Jones Day attorneys posted the order on the federal bankruptcy web site Tuesday, ahead of U.S. Bankruptcy Judge Steven Rhodes' ruling on the city's plan of confirmation Friday afternoon.

Rhodes will weigh in on whether the plan, which sheds $7 billion of debt and invests $1.7 billion into city services, is fair to creditors, as well as whether its unequal treatment of unsecured creditors is justified and whether it's feasible and sustainable over the long-term, among other considerations.

The 163-page proposed order outlines the legal arguments in defense of the plan that the city's attorneys offered during the recent four-week trial on the confirmation plan.

Detroit's decision to give pensioners higher recoveries than its other unsecured creditors was fair and reasonable, attorneys argue, for several reasons. Among them are that bondholders, as sophisticated investors, were more familiar with the risks of investing than its retirees.

 "It would be practically impossible to confirm a workable plan without discriminating among unsecured creditors because, with respect to the pension claims in particular, the city's recovery will turn in large part on its ability to marshal the support of its residents in general and its retirees, employees and their labor unions in particular," the order says.

The city's recoveries for pensioners are expected to be around 95%, and possibly higher. Attorneys have been reluctant to name an exact recovery figure, and the proposed order continues to leave blank final recovery estimates.

Unlimited-tax general obligation bondholders settled for 74%, and limited-tax GO holders settled for roughly 34%. The holders of $1.5 billion of the city's pension certificates of participation, who were the last holdout creditors in the case, will see a 14% cash recovery supplemented by various real estate development deals, vacant land, and long-term leases on city assets.

"Critical business considerations justify the differential treatment of pension claims," the proposed order says. Those considerations include the need for the city to maintain a "stable and motivated" workforce, address the "expectations of creditors" under the Michigan Constitution, which has a provision protecting pensions, and the need to confirm a workable plan of adjustment.

"The reasonable expectations of creditors further demonstrate that the differential treatment of pension claims is fair and reasonable because, while many of the city's institutional creditors affirmatively chose to invest in the city and possessed both the experience and sophistication necessary to evaluate the risks related to such an investment, individual holders of pension claims had no meaningful opportunity to protect themselves from such risk because they had little control over how much the city contributed to pensions, how pension assets were invested and how the retirement systems were operated," the proposed order says.

The treatment of the bondholders and COPs holders is also reasonable because it is the result of "protracted and comprehensively negotiated settlements," and reflects creditors' arguments as to security and priority of their claims under state law. In addition, in the case of the certificate holders, the treatment is fair because it reflects the "long-term value to the city of the substantial investment in, and redevelopment of, city assets under the settlements between the city and holders of such claims," the proposed plan says.

Detroit's attorneys argue that the city cannot generate new revenue through tax increases to improve recoveries, but note that the plan is bringing in "multiple" sources of new revenue. Chief among those is the stated $816 million in public and private money that is part of the so-called "grand bargain" to boost pension recoveries in exchange for shifting the city's prized art collection at the Detroit Institute of Arts into an independent trust.

Dismissal of the plan would also deprive the city of a crucial $1.7 billion plan to reinvest in services and operations over the next 10 years, attorneys argue. The city will be able to "arrest the reinforcing trends of population loss, declining property values and declining revenues if adequate services are restored, blight is remediated and the city becomes a more attractive place to live and work," the order says.


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