CHICAGO - Michigan senators heard testimony Tuesday on a bill that would give unlimited-tax general obligation bondholders a statutory lien, as officials from the state treasury department pushed hard against the move.
The Michigan Senate Finance Committee did not take a vote after the testimony, as Chairman Jack Brandenburg, R-Harrison Township, was not present.
They expect to vote on it next week.
The House passed the bill in June and sent it to the Senate.
House Bill 4495 would amend the state's municipal finance act to provide for a statutory first lien on taxes that are subject to an unlimited tax pledge, and require a portion of the taxes collected to be held in trust for the owners of the municipal securities.
The statutory lien would apply to any ULTGOs, even those issued before the bill became law.
With the bill, Michigan is seeking to ensure that ULTGOs are treated as secured in a Chapter 9 bankruptcy and also ensure that the revenue backing the bonds would be placed in a trust for bondholders. A rising number of states have started to contemplate the move, with California and Rhode Island recently passing similar legislation.
Representatives from two bond insurance firms testified in favor of HB 4495, while two officials from the Michigan Department of Treasury weighed in against it.
"I'm told this would hardly benefit us at all," said Howard Ryan, the director of treasury's legislative affairs division. He spoke along with Mary Martin, director, Bureau of State & Authority Finance.
"This is about general obligation debt, which is already benefiting from full taxing power," said Ryan. Ryan said the treasury department thinks there is no guarantee that a federal court judge would not simply "pierce" the statutory lien the way Judge Steven Rhodes did with Detroit's unlimited-tax general obligation pledge.
He also said a statutory lien and trust would pit pensioners against bondholders in the case of a municipal workout.
"If this were in place for the Detroit deal … it means that all the pensioners would have had to take a bigger hit in Detroit to the benefit of the bondholders," Ryan said.
Ryan told lawmakers the "New York bond insurance firms" were in favor of the bill only because it would "shore up their balance sheets."
Martin testified that her analyses showed that debt-service savings from the new protections would be "minimal" for most local governments. She said the retroactive provision in the legislation means that local municipalities and school districts would have to incur the costs of setting up legal trusts for outstanding debt.
"We don't even know what this retroactivity means from a practical standpoint," Ryan said.
Ken Epstein, a managing director at National Public Finance, and Del Chenault, Director of Government Affairs at Clark Hill PLC, which was contracted by MBIA and National, testified that the policy would lower local borrowing costs and clear up a costly ambiguity in state code that's existed since Detroit treated its ULTGOs as unsecured.
"There is empirical evidence that suggests Michigan is paying more than other states across the nation, and it has to do largely with the ambuigity in the statute," Esptein told lawmakers. He said local governments pay 30 to 40 basis points more than comparably rated local governments in other states, a spread due to Michigan allowing Chapter 9 lacking a statutory lien.
Chenault said the legislation would mainly serve to codify existing practice, and noted that a rising number of states are contemplating similar liens.
"The only thing you can surmise from treasury's opposition is that they intend to impair unlimited-tax general obligation bonds," Chenault said. "We have to say that's not something that we as a state should embrace. We need to slam the door on this and make it clear to the bondholders and the market that … Detroit was the exception and it's not going to be the rule going forward."
