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Michigan Treasurer: Loss of EM Law Won't Be Fatal

CHICAGO — Michigan Treasurer Andy Dillon will be disappointed if voters overturn the state’s emergency management law — the strongest in the nation — but said the loss would not spark a string of bankruptcies or turn the Michigan local government landscape into one resembling California’s.

In the year and a half since it was passed, the law has been used to solve the most pressing problems facing the state’s most stressed jurisdictions, Dillon said Friday in an interview with The Bond Buyer.

So even if voters opt to overturn the law in a Nov. 6 referendum, the state’s previous emergency management, or EM, law, combined with a few new models, should be sufficient for now, he said.

“I’d be really disappointed” if it were overturned, Dillon said. “People in the municipal market, they give us a lot of credit for the law. But if I look at our cities and school districts, we’ve accomplished what we need to do for now.

“We’ve done what needs to be done in Pontiac and in Flint,” he added. “Three or four years down the road it may be different, and overall it will be a slower and more difficult process, but not fatal.”

Dillon spoke after he, Gov. Rick Snyder and state budget director John Nixon met Thursday with all three major rating agencies in New York City in an ongoing effort to regain Michigan’s triple-A rating.

It’s the second year that Snyder led a delegation to meet with credit agencies to tout what he calls the “reinvention of Michigan.”
This year’s meeting comes ahead of a roughly $100 million general obligation bond deal set tentatively for Nov. 8.

That’s just two days after voters will weigh in on whether to repeal the EM law, known as Public Act 4, as well as five other major ballot initiatives with the potential to have a big impact on the state’s future. One measure would make collective-bargaining rights part of the constitution, and another would require a two-thirds legislative supermajority for any tax increases.

When the state Board of Canvassers approved the initiative for the ballot, the emergency manager law was automatically suspended. The suspension triggered the revival of Michigan’s previous law for fiscally stressed jurisdictions, Public Act 72.

That law lacks what is considered Public Act 4’s most powerful feature, the ability to unilaterally amend or terminate a labor contract. But it’s still workable, Dillon said.

“The state lived with PA 72 from the late 80s until 2011, so it works,” he said. “What is better about PA 4 is the ability to come in sooner and get out faster. It would just take us longer under PA 72. If you can’t negotiate the contracts, then you just have to wait them out. It’s slower and more painful, but it will happen.”

There are currently seven jurisdictions under emergency management, with an EM expected to be named soon in an eighth, Allen Park. Dillon said the state is preparing to exit three stressed cities: Ecorse, Pontiac and Benton Harbor.

The emergency managers in those cities tapped PA 4 to implement a swath of changes that address core costs, like labor contracts.

In Allen Park, he said an emergency manager lacking the powers of PA 4 would likely have a difficult time because one of the biggest problems is a police and firefighter contract that is “virtually impossible for the city.”

In Detroit, Mayor Dave Bing relied on powers in PA 4 to order more than $100 million of wage and benefit cuts to current contracts over the summer. Those cuts are key to Detroit’s recovery and will remain even if PA 4 falls, according to Dillon.

“That was the city’s biggest challenge, and now you’re getting to the point where you can operate,” said Dillon, a former Democratic speaker of the House appointed by Snyder, a Republican, when he took office in January 2011.

Detroit operates under a consent agreement with the state instead of an EM. The agreement has some ties to PA 4 but would not be overturned if the law is overturned. Top state officials would likely push for a new law that features the use of consent agreements and financial advisory boards for fiscally stressed communities if PA 4 falls, according to Dillon.

“We have other ways to kind of develop a similar outcome,” he said.

Critics of Public Act 4 argue that the law protects bondholders above all other creditors, an argument that Dillon said reflects a lack of understanding of the municipal market.

“When you have a troubled city, there’s an intercept agreement for bondholders,” he said. “I appreciate Main Street saying everyone should share in the pain, but troubled cities have to structure their deals in a certain way to get access to the market.”

On the subject of the Motor City, Dillon downplayed a recent warning from members of the financial advisory board that Detroit could run out of cash in a matter of months. “I have money in escrow, so I have the ability to make payments,” he said, adding that the release of the money is tied to the city making certain reforms.

Dillon said the city hopes to restructure more of its debt within the next three to four months to push off near-term debt service and capture interest-rate savings. He said he wasn’t certain of the size of the deal or how much it would save, only that it would “free up some of their cash flow.”
He added that officials are considering taking out some costly interest-rate swaps hedging Detroit’s debt.

“The progress is slow, it won’t be a one-year turnaround, but Detroit is fixable and we’re optimistic,” said Dillon, adding that rating agencies link the city’s health to Michigan’s own credit. “People want to make sure that our biggest city is heading in the right direction,” he said.

Snyder has made the annual trip to the rating agencies a priority. Michigan is among the states rated lowest by all three major rating agencies, a slide that has taken place over the last decade. The state lost its AAA rating from Standard & Poor’s in 2003, and since then has endured several rounds of downgrades.

After last year’s visit, Fitch Ratings revised its outlook to stable from positive. Fitch and S&P rate the state AA-minus. Moody’s Investors Service rates it Aa2.

Topics with the rating agencies ranged from the automotive industry to the math behind the structural balance in the new fiscal 2013 budget, Dillon said.

Snyder touted the fact that Michigan is enjoying one of the nation’s strongest employment and housing-market growth rates.

Revenues are ahead of forecast, and recent budget measures, such as a $120 million prepayment to its other-post employment benefit liability, helped bring that liability down to $10 billion from $15 billion. The Snyder administration is now implementing a three-year budgeting process, he said. The fate of the emergency management law was also part of the conversation.

“Everyone knows it’s a credit positive, and it’s good if you can continue to have it going forward,” Dillon said. “We’ve not been like California. We’re reinventing the state. There’s a lot of people that want to go backward, and the [ballot] initiatives are aimed at keeping the status quo.”

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