City's funds have gone to court to try and derail the bankruptcy amid concerns benefits will be slashed for 20,000 retirees
A federal judge will decide on Wednesday whether to allow Detroit's historic bankruptcy case to proceed as opponents lobby for the filing to be blocked amid concerns about its impact on pensioners.
US bankruptcy court judge Steven Rhodes will hear an appeal brought by Kevyn Orr, the city's emergency overseer, to put a hold on lawsuits aimed at stopping the so-called chapter 9 filing.
Detroit's pension funds have gone to court in an effort to derail the biggest municipal bankruptcy in US history amid concerns that benefits will be slashed for the city's 20,000 retirees.
Orr's opponents won the backing of Ingham County judge Rosemarie Aquilina on Friday when she directed Orr to withdraw the bankruptcy petition and said it violated Michigan's constitutional protection of retirement benefits.
Orr made the decision to file for chapter 9 bankruptcy protection last Thursday after failing to reach agreement with the city's creditors and pension funds over the city's $18bn-plus debts.
The filing puts at risk benefits now being paid to former city firemen, policemen and others in a move that is being closely watched by other cities struggling to keep up with escalating pension costs. Detroit's 100,000 creditors are also expected to lose money.
Aquilina last week expressed "very serious concerns" and the "rush to bankruptcy court." Aquilina said: "Plaintiffs shouldn't have been blindsided."
Pension funds have asked for a halt to all bankruptcy hearings until the case in Ingham County is resolved.
On Monday, Aquilina adjourned a hearing in another case brought by city pension funds to 29 June. "This is a very important issue," she said. "I understand that there may be this question of moving it to federal court … but these are state issues. We're dealing with the state constitution and an emergency manager who is a product of the state legislation."
"As you all know, my decision last week was because there's been a violation of constitution. I don't believe the constitution should be made of swiss cheese," she said.
Some Detroit bonds have risen to three-month highs on bets that Orr's plan to give bondholders less than 20¢ on the dollar won't hold up in bankruptcy court. Experts said the bankruptcy court may end up cutting investors a better deal than the emergency manager had first offered at the expense of the city's retirees.
Alan Schankel, head of fixed-income research at bond specialist Janney Capital Markets, said that with the backing of the state it looked all but certain that the bankruptcy filing would proceed. "This will be a very negative experience for the city," said Schankel. "I don't think it will come out of it as well as it would have had the parties agreed to the emergency manager's plan that he set out in June."
He said that pensions and other benefits were certain to be cut and that bond holders could end getting more from the courts than Orr had originally offered before he filed for bankruptcy.
The bankruptcy could take "at least a couple of years" to wind its way through the court and could have a major impact on the ability of other cities to raise money, especially those in Michigan or those with poor credit ratings, Schankel said.