CHICAGO -- Though Detroit has redistributed millions of dollars meant for debt payments into other funds, the city has not done so for its unlimited-tax general obligation bonds because those bonds are a subject of federal mediation talks, the city said Monday.
Detroit last month redirected $95 million meant for debt payments on its limited-tax GO bonds and its pension certificates to pay for consultants and other restructuring-related costs. The move was revealed in a budget amendment memo approved by emergency manager Kevyn Orr and obtained last week by the Detroit City Council.
But the budget move left untouched money meant for payments on the city’s unlimited-tax GOs. That left some in the municipal market wondering if Orr was treating the ULTGOs differently than other bond debt, even though his creditor proposal treats the ULTGOs as unsecured, on par with its limited-tax and pension certificate debt.
It turns out that the city has held off on reallocating the revenue meant for ULTGOs because those bonds are the subject of ongoing mediation talks as part of the part of the city’s bankruptcy process, Orr spokesman Bill Nowling told The Bond Buyer Monday.
“The city did not move the ULTGOs because some of them are secured and the unsecured are tied up because of on-going federal mediation,” Nowling said in an email.
Detroit has $369 million of ULTGOs that it’s treating as unsecured. Another $100 million of ULTGOs are considered secured because they have a secondary lien on state aid.
The three bond insurers who wrap the bonds sued Detroit two weeks ago, asking the federal judge overseeing the Chapter 9 case to force the city to set aside the revenue meant for the GO bonds.
Assured Guarantee Municipal Corp. and National Public Finance Guarantee Corp. argued in their joint challenge that it’s illegal for Detroit to use money raised under a voter-approved separate levy for any purpose other than for unlimited-tax GOs debt service.
The challenges are relatively narrow in that they only request an order from the judge forcing the city to set aside the disputed voter-approved property tax revenue throughout the Chapter 9 proceedings, assuming the city is declared eligible. The lawsuits do not delver into the deeper, possibly precedent-setting, question of whether Detroit can legally treat its unlimited-tax GOs as unsecured.
Ambac Assurance filed its own lawsuit, which was expanded to include the limited-tax GOs.
Gerald Rosen, chief judge for the Eastern District of Michigan, is overseeing mediation talks between Detroit and several of its creditors to try to reach out-of-court agreements and speed up the bankruptcy process.
The city defaulted on its GO payments due Oct. 1, including $9.3 million of ULTGO payments. It’s expected to default on its $47.6 million ULTGO principal and interest payment due April 1, 2014 unless a settlement is reached.