A U.S. bankruptcy judge rejected a deal on Thursday that would have allowed Detroit to pay two banks $165 million to conclude a disastrous pension debt agreement, which has been partly blamed for bankrupting the city.
Judge Steven Rhodes turned down the compromise on the premise that it was “just too much money.” He said that Detroit must not make poor financial decisions as it endeavors to get out of bankruptcy.
It is not the first time Rhodes has struck down such a deal. Back in December, he rejected a plan to pay the banks $230 million.
Detroit’s financial woes
Once at the heart of America’s thriving automobile industry and one of the country’s most populous cities, Detroit has been on a steady decline over the past few decades.
Deep in financial trouble in 2009, Detroit pledged a critical revenue source, casino taxes, as collateral to avoid defaulting on pension debt payments.
That agreement allowed the city to get fixed interest rates on bonds with UBS and Bank of America Merrill Lynch. But the deal backfired when rates dropped during the recession.
Drowning in debt, the city of Detroit filed for bankruptcy in July 2013, becoming the largest city in the country ever to do so.
The deal is considered a crucial step as the city comes up with a sweeping plan to exit insolvency. Detroit had even lined up a loan to pay for the settlement.
State efforts to help Detroit
Earlier on Thursday, Michigan Gov. Rick Snyder met with lawmakers to discuss the possibility of contributing state money to shore up Detroit’s pension plans and prevent the sale of city-owned art, days after foundations committed $330 million to the effort.
The governor spoke with the senators behind closed doors and may soon ask the legislature to match the foundations’ contribution over a number of years, possibly in his February budget proposal but not during his State of the State speech Thursday night.
Senate Majority Leader Randy Richardville confirmed the talks about state involvement but said no final plan or request has been made to legislators, nor have they made any commitments.
He said he was “cautiously optimistic,” however, that a solution “will come forth sometime in the near future.”
“Detroit is hugely important to everybody in this state,” Richardville said.
Emergency manager Kevyn Orr, who runs Detroit, says two pension funds are underfunded by $3.5 billion.
A deal involving the state and foundations would help retirees but probably wouldn’t alleviate all their pain in the final plan to fix $18 billion in long-term debt.