CHICAGO - A key Michigan Senate committee is expected to take up the hot issue of statutory liens for local unlimited-tax general obligation bonds as soon as Sept. 29.
The Senate Finance Committee is expected to hold a hearing on House Bill 4495 on Sept. 29, lawmakers' first day back to work after the summer recess. A spokesman for the Senate Republicans said an immediate vote was unlikely.
The House passed the bill in June and sent it to the Senate, where it was referred to the committee on finance. The bill would seek 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.
With the legislation, Michigan is wading into a national debate on statutory liens sparked in part by Detroit's 2013 bankruptcy.
More states are considering the move as a way to protect bondholders in the context of a Chapter 9. California and Rhode Island both enacted statutory liens on GOs after local bankruptcies.
"It's an important topic and I think you're going to see more and more emphasis on making sure it's clear," said municipal bankruptcy expert James Spiotto, managing director at Chapman Strategic Advisors. Spiotto has written articles promoting statutory liens for
Detroit stopped making payments on all its general obligation bonds in May 2013, before its bankruptcy filing, in which it treated the debt as unsecured. The city eventually settled with ULTGO insurers for a 74% recovery.
"If the state law mandates that the revenues be levied, collected and paid to the bondholder, you can't change that state law in a Chapter 9," said Spiotto, who testified in favor of the bill at a House hearing last year. "You lower borrowing costs by reducing the perception of risk, and that's what a statutory lien does. We have to be clear what bankruptcy is and what it isn't, and it isn't a rewriting of state law; it's a readjustment of state debt."
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.
The legislation would lower borrowing costs for local governments that issue ULTGOs, according to analyses by the House and Senate Fiscal Agencies.
"Bond rating agencies have stated that higher bond ratings would be available for debt secured with the requirements that dedicated tax revenue be held in trust for the owners of the municipal security and that there be a statutory first lien on taxes subject to the unlimited-tax pledge," the Senate Fiscal Agency said. "An improved bond rating would result in lower interest costs for the issuing local government, which would result in lower taxes levied for the retirement of the debt."
In August, Detroit came to market with its first post-bankruptcy bond deal, which featured a statutory lien on the city's income tax revenue, under state legislation designed to boost that transaction.
It was widely thought by market participants, as well as public officials, that the city would only be able to gain market access with the new statutory lien and other state-crafted protections.
