CHICAGO -- The federal judge overseeing Detroit’s bankruptcy Friday approved a plan for the city to issue $60 million of debt to finance repairs to its public lighting system.

The deal, which will be conducted through the Michigan Finance Authority as a private placement to Citi, is expected to be the first in a borrowing plan that could total $210 million. A second $150 million bond sale is expected next year. The $60 million borrowing will be issued as short-term notes.

U.S. Bankruptcy Judge Steven Rhodes’ order is a blow to bond insurers and other creditors who challenged the plan because it would tap a piece of the city’s annual utility tax.

An official with the newly created Public Lighting Authority said he expects the deal to close within the week.

“Today’s ruling means that we will be able to move ahead without delay in our mission to give the citizens of Detroit the lighting they deserve,” lighting authority director Odis Jones said in a statement.

The plan will tap up to $12.5 million in annual utility tax revenues for debt service. Rhodes’ order said the amount cannot exceed $12.5 million in any calendar year. Detroit’s utility tax totals roughly $40 million a year.

The deal will “benefit the debtor and its citizens and is a sound exercise of the debtor’s business judgement, is in the best interest of the debtor, its creditors and other parties in interest and is based on good, sufficient and sound business purposes and justifications,” Rhodes said in his order.

“Under the circumstances of this case, the terms and conditions of this order are fair and reasonable and will facilitate the debtor’s improvement of its public lighting system.”

The city reached the agreement in good faith, Rhodes said. Nearly half of the city’s streetlights reportedly are broken. Proceeds from the $60 million deal will finance the initial three-year stage of the plan.

The city was not required to secure the court’s approval, but Citi would not close the deal without it.

A hearing on the matter was held Nov. 17. Rhodes’ temporarily halted a decision after questioning whether bond firm Miller Canfield Paddock and Stone PLC has a conflict of interest because it represents the city on the lighting agreement as well as on its bankruptcy case.

Miller Canfield, the city and the lighting authority last week filed briefs arguing that there is no conflict because the city’s interests are aligned with the lighting authority’s, each had independent legal counsel, and that Miller Canfield’s role, of bond counsel, was relatively minor.

The Allen Law Group PC is primary legal counsel to the lighting authority, and Jones Day, which represents the city on its bankruptcy case, also represented the city during lighting transaction negotiations.

The Michigan Finance Authority originally planned to use Miller Canfield as bond counsel on the transaction as well, but after Rhodes’ hearing, opted instead to hire Dickinson Wright as bond counsel, according to a state court filing.

The lighting plan sets up the new bond-issuing authority that is allowed to borrow up to $210 million of bonds to finance upgrades. Detroit’s plan, filed with the bankruptcy court on Oct. 23, calls for the Michigan Finance Authority to privately place the debt with Citibank NA, and lend the proceeds to the authority.

The structure includes an intercept feature that places all utility tax revenue with a trustee, who will set aside debt service payments.

Bond insurer Syncora Guarantee Inc. was joined by Ambac Assurance Corp. as well as a European bank that holds some of the city’s pension certificates, the Michigan Council 25 of the American Federation of State, County and Municipal Employees, and a committee representing 23,000 Detroit retirees, in challenging the borrowing plan.

The creditors argued that the city had not proved it was the best plan to repair the system and that the borrowing would tie up utility tax revenue. Syncora said the proposal should be introduced as part of the city’s plan of adjustment.

Jones Day attorney Robert Hamilton argued in the Nov. 27 hearing that the utility taxes can only go to the new public lighting authority and not to the city’s general fund, so the pledge would not mean a loss to creditors.

The plan to repair Detroit’s lighting system began more than a year ago and required passage of a new state law. Emergency manager Kevyn Orr signed an order creating the Public Lighting Authority less than two months into office.

Also Friday, the city’s largest union, the American Federation of State, County & Municipal Employees, joined by AFL-CIO and the AFSCME chapter for Detroit retirees, filed an appeal of Rhodes’ Dec. 3 order finding the city legally eligible to enter into Chapter 9 bankruptcy protection.

The city’s two pension systems appealed the ruling Dec. 4.

The unions appealed to the U.S. District Court for the Eastern District of Michigan.

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