Detroit Rejects Michigan Governor's Consent Decree

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CHICAGO — Detroit would issue $100 million of new-money self-insurance bonds and push off $37 million of near-term debt service as part of Michigan’s plan to pull the city back from the brink of insolvency.

The state, which approves all city debt issuances, said it would only allow the debt transactions if Detroit officials signed off on a consent decree Gov. Rick Snyder unveiled Tuesday.

But Mayor Dave Bing and several City Council members have rejected the consent agreement, saying it strips local elected officials of power and is a state takeover in all but name.

Snyder’s proposal would set up a nine-member financial review board, modeled after a similar board that oversaw New York City in the late 1970s, that would oversee Detroit’s restructuring plan, budgets and borrowings.

With the city set to run out of money by May, it’s now a “question of who will blink first, the mayor or the governor,” as one source close to the city put it.

The state’s plan would have Detroit issue $100 million of bonds to fund its self-insurance payments in 2012 and 2013. Proceeds would make payments that usually come from the city’s general fund.

The debt would be issued through the Michigan Finance Authority and would be backed by a state aid intercept that would strengthen the bonds, according to a source familiar with the proposal.

The city would achieve another $37 million in savings by pushing off near-term debt service on general obligation bonds.

Detroit issued bonds to fund self-insurance payments in 2003 and 1995.  Both issues were 10-year bonds. The 2003 bonds, which are taxable, have a payment due in May with a final payment in May 2013. The city paid interest rates of 4.82% on the 2012 bonds and 4.97% on the 2013 bonds. The 2013 bonds were last traded in May 2011 with a 5.6% yield.

A 10-member state team has been reviewing Detroit’s books since late December. Like the city, it is reviewing Snyder’s proposed consent decree and is expected to recommend to Snyder by the end of March whether Michigan should appoint an emergency manager or take another route.

For city officials, the most controversial aspect of the consent decree is the financial review board. The board would supervise most of Detroit’s finances, including its bond transactions, and oversee the city’s chief operating officer, chief financial officer and human resources director. It would also be authorized to review and approve any capital market transactions including interest rate swaps, proposed changes to the city’s debt structure, asset sales and collective bargaining agreements.

The nine-member board would be composed of the state treasurer, one member appointed by the governor, one appointed by the treasurer, two picked by the mayor, three by the mayor and the City Council — who would choose from a list of six candidates provided by the governor — and one individual appointed by the council.

Michigan’s borrowing proposal comes despite the state’s criticism that Detroit has relied too heavily on deficit borrowings to cover its shortfalls in the past. A preliminary state review of the city’s finances released in late December criticized the city for an “improper reliance on external borrowing,”

“One of the primary methods the city has used to reduce the deficits has been to issue more debt,” the Dec. 21 report said. “Debt proceeds reduce the deficit in the year the debt is issued, but reduce fund balance over time as debt service payments increase.”

The city has turned to deficit financings in 2005, 2006, 2008, and 2010. In 2010, annual debt service requirements exceeded $597 million, according to the report.

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