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Hamtramck, Mich., Officials Hope to Keep Bankruptcy Idea Alive

NOV 18, 2010 4:47pm ET
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CHICAGO — Officials in Hamtramck, Mich., said they would try to set up a meeting with state Treasurer Robert Kleine in a fresh effort to win permission to file for bankruptcy.

The troubled Detroit suburb sent a letter to the state Nov. 10 asking for permission to file for bankruptcy, warning that it would run out of money by Feb. 1, 2011.

On Wednesday the state denied the city’s request and offered instead three loan options: a 20-year emergency loan, a property tax anticipation note, or authorization to borrow by issuing fiscal stabilization bonds.

But city manager William Cooper said a loan would not be sufficient to address Hamtramck’s long-term financial pressures.

Cooper said officials see little downside to bankruptcy, in part because the city maintains no credit ratings.

“We don’t see a great downside to bankruptcy — it will protect the city in the short run and address critical problems we’ve got in the long run,” Cooper said. “It was brought to our attention when we started considering that it could have a potentially negative effect on our rating, and we said, 'What rating?’”

“We don’t want to be a leader here,” Cooper said. “Once the door is opened, there will be a lot of people taking a hard look at this approach. And it’s not just in Michigan — it’s a nationwide problem.”

Cooper noted that more than 60 municipalities across Michigan are considered fiscally stressed by the state treasurer, which maintains a watch list. Hamtramck is not on the watch list.

The city’s chief problems are due to an ongoing dispute with Detroit over payments tied to a General Motors plant and stalled talks with unions over contracts.

“A loan is not going to solve our problem,” Cooper said. “We know the short-term problem has to be addressed, but it’s critical that we set ourselves up for the long erm. We’re afraid the only way to do that is get ourselves into bankruptcy and get ourselves stronger on the other side.”

No Michigan local government has ever filed for bankruptcy. The state’s 20-year-old Public Act 72, or Local Government Fiscal Responsibility Act, is the primary tool for helping fiscally stressed local governments and school districts.

The state says only an emergency financial manager can declare bankruptcy for a municipality in Michigan.

But Cooper said city attorneys believe that Act 72 has a provision that allows for a municipality to declare bankruptcy — with state permission — even if it is not under emergency financial management.

Hamtramck spent just under six years in emergency financial management, starting in 2000. During that time, it sold two fiscal stabilization bond issues that totaled $4 million, Cooper said.

The city is currently paying $600,000 in annual debt service on those bonds and does not expect to miss a payment, he said. The city has no other outstanding bond debt.

Cooper said Hamtramck attorneys were “doing more homework” and would ask for a meeting with Kleine in the next few weeks.

Treasury spokesman Terry Stanton said the department would be open to the request.

“I certainly wouldn’t rule it out,” Stanton said. “We are more than happy to discuss the situation with the city, as we are with any local unit across the state with financial difficulties.”

Kleine is on his way out as treasurer. He will be replaced in January by former Democratic Speaker of the House Andy Dillon, who was tapped for the spot by the state’s incoming Republican Gov. Rick Snyder.

Cooper said he hoped Dillon would attend the meeting as well.

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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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