Detroit Experts: State Needs to Step Up

DETROIT -- Michigan needs to play a bigger role in Detroit’s recovery, and it should start by helping the city access the capital markets, a panel of municipal finance experts said Friday at the Michigan Municipal League’s annual meeting here.

“If our credit ratings won’t allow us to borrow the money, we should ask the governor to allow us to borrow the money through the Michigan Finance Authority,” said Gary Brown, a former City Council member who is now the city’s chief operating officer.

In a wide-ranging, two-hour talk, the six panelists discussed the factors that drove the city to file for Chapter 9 and its prospects for a long-term recovery.

The city’s junk-bond ratings coupled with emergency manager Kevyn Orr’s treatment of the city’s unlimited-tax general obligation bonds as unsecured have effectively cut the city off from the markets.

Bond buyers have zero interest in buying Detroit bonds, and that could have a big impact on the city’s credit moving forward, said Jane Hudson Ridley, a Standard & Poor’s analyst who covers Detroit.

“No investors are going to buy any Detroit debt anytime soon, there’s no interest in that paper,” Ridley said. “There is so much that is funded through bonds, and if you don’t have access that cuts off funding in a big way.”

Orr’s move to treat the city’s unlimited-tax GO bonds as unsecured has investors “up in arms,” Ridley said. “A lot of investors wanted us to downgrade the state of Michigan because [the state] didn’t support Detroit,” she said. “We said, ‘They have no obligation to do that.’”

Brown noted that Orr’s restructuring plan relies on $1.25 billion in new money to rebuild the city over the next 10 years.
“The bonding is going to be huge,” the COO said. “It’s going to be critical to access the capital bond market to get some of the changes done so the public can feel some of the changes that are being made.”

Eric Scorsone an economist at Michigan State University with a focus on public finance, said the state should look to the help New York State gave New York City during that city’s crisis in the late 1970s.

“Michigan is going to have to play a role like the state did in New York because future creditors will leave a lot of hesitation about providing access,” said Scorsone, who also acts as advisor to Orr on revenue forecasting.

“That has to happen as part of the restructuring,” he said. “The state has a critical role that’s equal to the bankruptcy court. The state government is ultimately the sovereign entity, so it has to play a critical role.”

States with strong, early intervention programs provide crucial support to struggling cities, said Frank Shafroth, director of the Center for State and Local Government Leadership at George Mason University.

Shafroth quoted from the bankruptcy judge overseeing the Jefferson County, Ala. case, who noted that the state played a big role in the county’s financial decline.

“State roles can be incredibly positive or, in the case of Jefferson County, it can be the precipitating factor that causes bankruptcy,” Shafroth said, describing Michigan’s local oversight program as “post-distress.” 

In addition to a strong state role, accurate revenue forecasts and realistic retirement benefits are key ingredients to Detroit’s long-term solvency, panelists said.

Under former Detroit Mayor Kwame Kilpatrick, the city not once but twice included $100 million in its budget assuming an expected sale of the Detroit-Windsor Tunnel that never ended up happening, Brown said.

That’s an example of years of bad revenue projections, coupled with unrealistic benefits and chronic state aid cuts that combined to drive the struggling city into bankruptcy, he said.

When he joined the City Council, Brown said he telephoned former city budget directors and asked them why the city’s fiscal position was so abysmal. All said the same thing: Overestimating revenues.

More recently, said Brown, he asked Charles Moore, of Conway MacKenzie, Detroit’s restructuring firm, to name the key problem driving the city into bankruptcy.

“He said it was benefits,” Brown said. “We just kept giving employees benefits what we knew, through revenue forecasts, that we could not live up to. We did it over and over.”

That’s not just a Detroit problem, he said.
“I can tell you with certainty that the list of cities on the governor’s watchlist is probably growing by the week,” he told the audience of local government officials from across Michigan. “You have to be realistic about the revenue that’s coming in and not overpromise on benefits that you cannot sustain in the future. That’s the thing that pushed us over the top.”

Accurate revenue forecasts helped lift New York City out of its near-bankruptcy in the late 1970s and in fact have helped the city manage the recent recession, said Scorsone.

“In post-1975 New York, there was a really good revenue-forecasting process [put into place],” said Scorsone. “All the mayors up to Bloomberg have benefited from what happened in that time.”

Scorsone said the city and the state are working to build systems that ensure accurate revenue forecasts into the future.

“We’re going to put into place a good process to avoid the Windsor tunnels of the future,” Scorsone said.

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