DETROIT (AP) — Detroit’s state-appointed emergency manager said Friday that an agreement to pay off banks and settle millions of dollars in debt tied to an interest rate swap deal resolves a “sordid tale” and fuels a massive recovery plan for the broke city.
Kevyn Orr testified in federal court that the proposal to terminate the deal for $165 million is best for Detroit, adding that it removes significant financial and legal risks and allows the nation’s largest public bankruptcy restructuring to proceed. It’s preferable, he said, to waging a lengthy, costly and potentially unsuccessful court battle with UBS and Bank of America.
“It finally resolves this issue — the whole sordid tale of the swaps — and provides the city with an opportunity to finally do some reasonable, strategic planning for years to come,” he said. “The city needs to stabilize its finances once and for all. It needs to get out from under this whole swap contract. ... The city cannot plan unless it removes this potential risk from the table.”
Detroit, which filed for bankruptcy in July, pledged casino tax revenue in 2009 as collateral to avoid defaulting on pension debt payments. The swaps allowed Detroit to get fixed interest rates on pension bonds with the banks.
The payoff had been $220 million, and Judge Steven Rhodes ordered the city to negotiate a better deal. He must approve the settlement, which is opposed by pension systems and bond insurers. The city also has agreed to lower a financing loan to pay the banks and make investments in some basic city services, including removing blight, updating information technology and other “quality of life” improvements.
Orr said he and his colleagues weighed whether to sue the banks and even approached officials with the Securities and Exchange Commission to investigate. He contended the transactions could have been fraudulent and illegal, but said legal opinions provided to the City Council concluded otherwise and state gambling regulators raised no concerns about the use of the casino tax revenue.