The City of Allen Park in Michigan is demonstrating a potential path for working through municipal financial stress by addressing issues relatively early on and by gaining important support from residents and the banking community.
As calls for austerity measures gain momentum in cities across the country, voters in the City of Allen Park, a suburb of Detroit with about 28,000 residents, recently overwhelmingly supported - by a 2-to-1 margin - a tax increase in order to save crucial public safety services and jobs. Several months beforehand, the city also arranged a cash flow loan from Amalgamated Bank to help shore up its liquidity.
Things could have potentially gone another way. An Emergency Manager, appointed by the Governor of Michigan, currently runs the City of Allen Park. The city has recently struggled with a below-investment grade credit rating, outsized long-term liabilities, and annual expenditures outpacing revenues.
But for the past 11 months or so, the City of Allen Park, under the direction of Emergency Manager Joyce Parker, has been working through a financial recovery plan which has quietly avoided bankruptcy's uncertain outcomes and its potentially lengthy and costly court proceedings.
The plan is working so far: the City of Allen Park has already paid back the loan and is on improving financial footing - without widespread public safety layoffs that would have hurt workers, families, and the community.
The City of Allen Park vote in August can be seen in some ways as an old fashioned demonstration of civic pride - illustrative of a long-standing notion that investment in essential public services makes a community a more desirable place to live, work, and raise a family.
At a time when cutting public jobs and services might seem inevitable, the vote demonstrates that in the right environment, citizens will support taxes that they believe will pay dividends to their community down the road in the form of better services, a more stable population, and higher property values.
The loan which Amalgamated structured for the City of Allen Park offered maximum repayment flexibility to the city, protected the bank's position through a revenue set-aside mechanism, and helped lay more solid ground for the recovery plan to take shape. Our majority union-owned bank was founded in 1923 to serve under-banked communities; working with cities to dig themselves out of financial difficulty and to maintain services is in line with our mission.
It's also good business: loans to distressed municipalities can not only help improve outcomes for municipalities and their stakeholders, but can also prove prudent risk for banks if properly structured and analyzed. Key considerations for a bank in working with distressed municipalities would typically involve structural protection of repayment sources along with a deep understanding of the local political climate combined with extensive analysis of state-level statutory provisions. The wherewithal to weather headline risk also doesn't hurt.
Combined with viable recovery plans and inclusive approaches for all stakeholders, short-term cash flow loans can help to provide the breathing space for cities to thoughtfully begin to re-work obligations and to embark upon a realistic path towards sustainability.
While there is no one-size fits all approach and certainly each financially distressed municipality needs to carefully consider its recovery options for its own unique situation and complexity, the City of Allen Park is currently on its way to potentially making a compelling case for tackling financial difficulties early on and for implementing a municipal financial recovery plan outside of a bankruptcy.
As we witnessed with the recent vote in the City of Allen Park, when a bank supports a city during its time of financial need, recovery plans can begin to take hold. And in the City of Allen Park, residents took the opportunity to reciprocate that show of faith in their local community by voting to protect jobs and safeguard their community.
Robert F. O'Brien is a senior vice president in public finance at
New York City-headquartered Amalgamated Bank, the largest union-owned bank in the U.S.
