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Michigan Governor to Detroit: State Won't Step In

MAR 15, 2012 6:30pm ET
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CHICAGO — Michigan Gov. Rick Snyder indicated Thursday that the state would not step in to help Detroit cover its looming debt payments even if the city does not have enough money to meet those obligations.

Snyder made the comments at a press conference as state and city officials battled for control of Detroit as it approaches insolvency.

“Much of Detroit’s debt is Detroit’s debt,” Snyder said when answering a question about the city’s upcoming bond payments.

He noted that some of the bonds are backed by state aid or a state pledge, but for the rest, “it’s not a liability to the state of Michigan, and as a practical matter, much of it belongs to the city.”

A spokesman for state Treasurer Andy Dillon said later that there is no indication yet that the city is going to default on its bonds.

“In most (if not all) cases, bonds were backed by a revenue stream-source,” spokesman Terry Stanton said in an email.

Stanton added that the state’s proposal to allow the city to push off general obligation bond payments coming due this year and next, coupled with a new-money $100 million bond sale, “would be very helpful in addressing the city’s cash-flow needs into the spring-summer. Those deals would also be backed by revenue-sharing payments.”

Detroit officials did not have an immediate response to questions about whether the city would be able to cover its upcoming payments on its own.

Detroit has roughly $450 million of unlimited-tax GO bonds and $486 million of limited-tax GO debt, all of it rated in junk territory. The city is set to run out of cash by late April or early May.

Most payments on its GOs are due in May and November.

The city has an additional $1.5 billion of certificates of participation that were issued in 2006 to pay off pension liabilities. The COP payments are due June 15.

Interest-rate swaps hedge $800 million of the COPs, and the appointment of an emergency manager would trigger a swap termination event that could force the city to make payments of between $280 million to $400 million.

Snyder acknowledged that the swap termination fees present a “complexity” as officials try to hammer out a final rescue plan.

He said the state would not step in with any short-term cash bailout unless the city agrees to a formal consent decree by March 26.

Even then, financial aid “depends on the resources of the state in terms of what’s appropriate,” Snyder said.

How a consent decree or a full takeover of the Motor City would affect the rest of the state’s credit remains uncertain, the Republican governor said.

“When Vallejo [in California] went bankrupt, it didn’t have a big impact, but you don’t know for sure,” he said. “That’s part of the unknown.”

Michigan will also not help the city restructure its pension or other post-employment benefit liabilities, according to Snyder. “Detroit is not alone in having high structural legacy costs, and right now we’re not in the position to single out one jurisdiction,” he said.

Meanwhile, Mayor Dave Bing and City Council members are busy drafting a counterproposal to the state’s consent decree, which the mayor rejected earlier in the week.

A copy of the counterproposal that is circulating preserves the mayor and the City Council’s power and reduces the size and authority of the financial advisory board Snyder proposed.

Snyder said the city has until March 26 to agree to a final consent decree. That is the date the state-appointed review team is due to make its final recommendation to the governor about whether Michigan should appoint an emergency manager, allow a consent decree or do nothing.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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