Michigan board votes to send state money to Detroit pension funds

Reuters News
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Posted: Dec 22, 2014 2:06 PM

(Reuters) - A Michigan board on Monday agreed to send nearly $195 million in state funds to Detroit's two retirement systems on Feb. 9 as part of a pivotal deal that helped to end the city's historic bankruptcy, a state spokesman said.

Jeremy Sampson, a spokesman for Michigan's Treasury Department, said the three-member Michigan Settlement Administration Authority took the action after the city's bankruptcy reached certain triggers, including the dismissal of legal claims against the state that were related to the bankruptcy.

The state funds are part of the so-called grand bargain, which includes $366 million from philanthropic foundations and $100 million from the Detroit Institute of Arts pledged over 20 years to ease cuts to pensions for Detroit retirees and save artwork from being sold to pay city creditors. The first payments by the foundations and the museum to the retirement systems totaling $23.3 million were made on Dec. 10, the effective date that marked Detroit's exit from the biggest-ever U.S. municipal bankruptcy.

The grand bargain, which was devised during U.S. Bankruptcy Court-ordered mediation, helped Detroit win support for its plan to shed $7 billion of its $18 billion of debt and obligations from the majority of its workers and retirees, as well as its pension funds. Judge Steven Rhodes approved the plan on Nov. 7.

Meanwhile, credit rating agencies are assessing a post-bankruptcy Detroit after downgrading its debt to the lowest levels on their scales in the wake of payment defaults.

Moody's Investors Service last week assigned Detroit an issuer rating of B3 with a stable outlook, keeping the city's debt solidly in the "junk" level. The rating agency noted that while Detroit slashed long-term liabilities and has improved near-term cash flow, it may "face difficulties if it experiences even modest declines in the key revenue streams that support general operations."

On Monday, Standard & Poor's Rating Services rated $287.5 million of the city's unlimited-tax general obligation bonds A-minus with a stable outlook. The debt, which has a fourth lien on Detroit's distributable state aid revenue, was distributed to bondholders on Dec. 10 to replace existing bonds under a settlement between the city, investors and bond insurers.

S&P also affirmed ratings of AA on Detroit's first lien bonds, AA-minus on second lien bonds and A-plus on third lien bonds that were issued in 2010 and 2012 and not impacted by the bankruptcy the city filed in July 2013.

(Reporting by Karen Pierog in Chicago; editing by Matthew Lewis)