Large Portion of Michigan Special Assessment Debt at Risk for Default

CHICAGO — Michigan fiscal analysts estimate that up to 15% of $1 billion of special assessment debt issued by local governments to finance residential growth is at risk for default.

Cities, townships, and some counties are finding themselves stuck with debt used to finance infrastructure, such as street lights and water lines. The vestiges of municipal growth were mostly for residential housing developments — and sometimes commercial properties — that failed to materialize after the housing crash.

If a district does not generate enough revenue to make debt payments, the bonds become a general obligation of the municipality that issued the debt, but analysts are warning that local governments often cannot afford it.

The Senate Fiscal Agency plans to release a report examining the problem in mid-November. Legislators have introduced a handful of bills to help localities deal with their special assessment debts — some of which are larger than their annual budgets, according to officials.

“Some of the debt is pretty secure, and things are going to get paid, maybe with some delinquency,” said Eric Scorsone, a chief economist with the Senate Fiscal Agency and author of the forthcoming report. “But in some areas, there was this wholesale effort to build streets, lights, and water lines, and then one house showed up, and that’s it.”

Many of the failed residential districts are located in the state’s southeast, between Lansing and Detroit, and in Genesee County, Scorsone said. Part of the problem is that so-called general law townships in Michigan have no debt limit, he said.

It has been tough to gauge how much special assessment debt has actually been issued in the state, how many developers are behind the projects, and how much is at risk for default, according to Scorsone.

“We need a better system for tracking debt,” he said. “It’s taken an enormous amount of effort to find out who has what debt.”

To pinpoint potential defaults, analysts are examining local delinquency rates for property taxes, debt service to revenue ratios, and comparing notes with the state Treasury Department, which has its own set of fiscal stress scores for local governments.

Scorsone is part of a new committee that looks at government fiscal stress in Michigan. The panel operates under the state’s chapter of the Government Finance Officers Association, and includes members of the Senate Fiscal Agency, the Municipal Advisory Council, and several Michigan-based bond industry professionals.

Meanwhile, several bills aimed at providing relief for localities grappling with failed special assessment districts are pending in the Legislature. HB 6181 would set up a state-funded revolving loan fund to help pay off bonds created by delinquent special assessments. It has attracted some controversy and is currently in the House committee on intergovernmental affairs.

Another package of bills, HB 5550-5554, passed the House in March, and would in part allow local governments to refund the debt without net-present savings to push out the maturities and lower annual debt service payments.

The bills would have to pass both chambers by the end of December or be reintroduced next year. Lawmakers who are busy campaigning will return to Lansing for only a few days during the lame-duck session in late November and December.

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Michigan
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