A game of cat and mouse is being played on the amount of the unfunded Detroit pension liability. A higher unfunded amount means retirees will have a larger claim on the City’s assets. If the unfunded amount is greater than 20% of the pension liabilities then Mr. Orr may have cause to remove the Trustees he is currently negotiating with. A lesser unfunded amount reduces the retiree’s claim and protects the Trustees.

I think Orr would like to see the claim higher because it gives him a chance to replace who he is bargaining with if the fund is greater than 20% underfunded. Orr is going to get 2 bites at the apple. He has a motion to be heard this Friday on whether a retiree committee should be formed. This is interesting for a number of reasons. In a chapter 11 it is unusual to have different classes of creditor committees and secondly the committee is likely to be populated with less sophisticated retirees who want to be part of the process. My guess is Orr thinks by having retirees in the room it will put pressure on the union officials who will also be on the committee to settle. If Orr loses his motion then I think he pushes hard on removing the Trustees and making the underfunded argument. This motion is key on Friday because if Orr wins he could have the best of both worlds – easier negotiators to deal with and a lesser unfunded amount.

At the end of day Orr only has so much money to parcel out; but it could impact the State obligation if it is judged they have to backstop the pension obligation. Expect the attorney general to side with Orr on this one to fight for the little guy and give him representation. The bankruptcy judges are very cognizant of protecting those who are not being represented. My educated guess is that Judge Rhoades approves Orr’s motion and the committee gets formed over the strenuous objections of the unions.