UPDATE 1-Detroit finance plan distributes pain unequally among claimants

DETROIT, Jan 31 (Reuters) - Detroit has circulated a plan for its finances that would require concessions from pension funds, seek reduced payments to some bondholders, and declare that a major interest-rate obligation is a disputed claim that is not part of the settlement, according to a city report.

The proposals, described in a copy of the report obtained by Reuters, are a major step in Detroit's historic bankruptcy case, a blueprint for how Emergency Manager Kevyn Orr proposes to treat more than $18 billion in debt and long-term liabilities.

After months of negotiations with creditors, it essentially sets terms for what could be a settlement of claims and could put pressure on Detroit's thousands of creditors to accept the proposed deal or face costly litigation.

Orr presented the proposed debt adjustment plan, required as part of a Chapter 9 municipal bankruptcy, earlier this week on a confidential basis. He still is at odds with pension funds about how large a cut they should take.

On one key aspect, the city's controversial interest-rate swaps deal with investment banks Merrill Lynch Capital Services and UBS AG, the city declares the contracts as a disputed claim and does not include them as part of the settlement plan.

The city also reserves a right to protect its share of taxes on casino revenues from any claims by the two investment banks. The revenue had been pledged as collateral for the swaps.

Different classes of creditors are offered a wide range of options. The proposal allows holders of some classes of general obligation bonds full repayment of their claims against the city. Some holders of $1.45 billion in debt sold in 2005 and 2006 to fund the city's pensions would receive only 40 percent of the face value of their securities, plus a share of new notes issued by the city.

Specifics of the city's plan for reduction in pension benefits are not detailed in the copy of the proposal obtained by Reuters. However, other news organizations reported the city's two pension funds fare better than bondholders under Orr's plan.

Jordan Marks, executive director of the National Public Pension Coalition, criticized the plan's treatment of public employee pensions.

"If the City fails to pay the pension funds anything short of what they are owed, it will mean painful cuts for firefighters, police officers, and thousands of other municipal workers, who earn an average $19,000 per year in retirement," he said. "Big banks, however, will feel little pain as Wall Street posted record profits in 2013."

Barry HoAire, portfolio manager of Bel Air Investment Advisors, Los Angeles, said bondholders may oppose the favored treatment of pensions. "It's clear they're proposing a more favorable outcome for pensioners," he said. "There is going to be a lot of back-and-forth, and I just don't think this is going to be accepted by bondholders.

Bill Nowling, a spokesman for Orr, did not respond to requests for comment.