CHICAGO - Flint, Michigan, in many ways a mini-Detroit, is likely to avoid bankruptcy amid improving financial conditions unless it loses a court battle over its effort to cut retiree health care costs, Moody's Investors Service says in a new report.
From an economic and demographic perspective, Flint, which is under state-controlled emergency management, is similar to Detroit, Moody's said. It's a former industrial hub that has suffered from major population and job losses, a weak tax base, high poverty and crime rates, and a "history of distressed finances," according to the ratings agency.
The city is 60 miles from Detroit. It's been taken over by the state twice in the last 10 years.
Unlike Detroit, Flint has benefited from several factors that could reduce the chance of Chapter 9, Moody's said. The state intervened earlier in Flint than it did in the Motor City, Moody's said.
It also has less debt than Detroit - one of the most leveraged cities in the U.S. - and because it is smaller, aid has had a bigger impact, analysts said.
"Detroit has a population seven times larger than Flint, with four times the geographic area and a tax base that is almost 15 times larger," Moody's analyst David Levett said in the report. In 2013, Gov. Rick Snyder gave Detroit $52.3 million to Detroit and $20.1 million to Flint to fight blight.
"While Detroit received well over twice the amount of Flint, Detroit has nearly seven times as many housing units as Flint, diluting the benefit to Detroit," Levett wrote.
Flint's emergency manager, Darnell Earley, has imposed aggressive cuts that have "substantially improved" the city's financial operations, Moody's said. Changes include restructuring pension benefits, outsourcing services, laying off 20% of employees and cutting wages by 20%.
But key to Flint's continuing recovery is Earley's effort to restructure retiree health care benefits. The move is key to the city's deficit elimination plan, Moody's noted.
As of 2010, the city's OPEB liability totaled $862 million. Since then, city managers have cut benefits for current retirees and eliminated it for new employees. The cuts have shaved the tab to $320 million, according to Moody's.
A group of retirees have challenged the restructuring in court. On June 30, a U.S. district court judge ruled that the city can temporarily implement the restructuring, lifting an injunction imposed in March 2013 after the retirees filed their lawsuit. In the ruling, the district court said the city had no other revenue-raising options and could be forced to cut public safety options if it cannot reduce OPEB payments. A trial date has not yet been set.
If the city loses, it could be forced to spend $5 million more a year, according to Moody's.
If it loses the case and is forced to make the higher payments, it could force a bankruptcy filing, Earley recently told the Associated Press.
