CHICAGO — Michigan will allow local governments struggling with debt to refinance it at a net present-value loss under a new law passed by legislators and signed by outgoing Gov. Jennifer Granholm last week.
The law is one of a handful of bills affecting bond issuance for local governments across the state passed by lame-duck lawmakers. It is aimed at relieving local governments facing high debt payments issued for projects that have failed to generate projected revenue streams — a growing problem for many Michigan municipalities.
Other new debt-related laws will allow local governments to issue bonds and loan the proceeds to property owners for energy efficient upgrades. One measure provides authority to issue tax-increment bonds issued on behalf of a major state initiative to build a new business corridor surrounding the Detroit Metropolitan Airport and Willow Run Airport. Granholm signed the bills in her final weeks of office.
A Republican-dominated Legislature — the vast majority of members will be new — and Republican Gov. Rick Snyder will take the reins of the state next week. They face a general fund deficit as high as $1.8 billion, according to recent estimates by state fiscal officials.
The refunding bill will allow local governments to restructure troubled debt, pushing out final maturities and lowering annual payments. Current law allows refinancing only if a present- value savings is achieved, except in a few circumstances.
Issuers will have to refinance the debt by the end of 2012. They need state approval and will have to hold a public hearing before the transaction. Many are expected to enter the market during the first quarter.
The new law aims to ease problems created by a weak economy where projected revenue streams backing many bonds are coming in weaker than originally expected.
"The law in Michigan before about 2001 permitted refundings for reasons other than simply achieving net present value," said Michael McGee, a principal of public finance at Miller Canfield, who helped write House Bill 5550. "We had about 60 years of experience with that and then changed the rule, so now we're going back to the prior rule for a temporary period in reflection of the economic downturn and especially the decline in taxable values and other revenue streams."
The new law will help governments lower debt payments to be more in line with revised revenue expectations.
Examples include the town of Standish, which borrowed to finance a new water line leading to a prison that the state later closed, and Rogers City, which regularly floats bonds to maintain a marina that has suffered unexpected revenue declines since 2008.
The bill is not necessarily intended for governments that issued bonds for special assessment districts that have failed to produce any revenue, McGee said.
"This bill might help a little, but that's a more serious problem," McGee said. "This is a case where there is a proven revenue stream, it's just developed more slowly than expected."
A state economist who analyzed the bill likened it to "refinancing your mortgage to save money for a few years and then pay a lot more later."
"Basically it's a Band-Aid, but I suppose it will help a bit," said Eric Scorsone, an economist with the State Fiscal Agency. Scorsone will leave the agency next week for a job at Michigan State University working on issues of financial stress and debt facing local governments.
Scorsone, who wrote a report highlighting problems with local special assessment debt that is expected to be released within the next few weeks, estimated that up to 10% of the troubled municipalities face possible default on the bonds. A bill targeting municipalities like Sylvan Township that are facing major problems tied to failed special assessment districts did not make it out of committee during the last session. House Bill 6181 would have set up a state-funded revolving loan fund to help pay off bonds created by delinquent special assessments. It sparked controversy and languished and later died in the House committee on intergovernmental affairs.
The stressed municipalities will likely make a fresh effort to pass a relief bill in the upcoming legislative session, McGee predicted.
"For those communities, this situation is only going to get more difficult," he said.
Granholm's signature last week on House Bill 5640 put Michigan in the company of 21 other states that allow municipalities to issue revenue bonds to finance loans to commercial and industrial property owners for energy-efficiency upgrades.
The program is known as property assessed clean energy, or PACE, bonds. The loans are repaid over a period of 20 years through a special assessment that appears on the property tax bill. The bonds are additionally backed by liens on the property.
Michigan's bill originally included residential homeowners. The provision was dropped earlier in the year after the Federal Housing Finance Agency directed mortgage giants Fannie Mae and Freddie Mac not to buy mortgages with PACE-type liens attached.
The problem is the loan's first-lien status, which gives it priority over mortgages when homeowners default. Michigan, like Ohio, sidestepped the problem by passing a law that targets only commercial and industrial property owners for PACE loans.
The legislature passed a six-bill package dubbed Next Michigan that supporters consider a major new program by the state to build a new business corridor, or aerotropolis, around the Detroit and Willow Run airports.
Included in the package is a bill that allows for the issuance of bonds backed by revenue generated by large TIF districts covering swaths of the business corridor.
"This legislation allows the leveraging of one of our state's greatest assets — the Detroit Metropolitan and Willow Run airport corridor — to attract businesses and create tens of thousands of jobs in southeast Michigan," Granholm said in a statement issued Dec. 15 after she signed the bill.
Granholm also signed into law a bill that expands the use of up to $1 billion of Great Lakes water quality bonds to include the cleanup of contaminated sites. Senate Bill 1180 allows the state to return unused Michigan Transportation Fund dollars to municipalities, which can use the money to pay principal and interest on certain bonds, among other purposes.
