PHILADELPHIA — Changes to the Tower Amendment to enable the Securities and Exchange Commission to oversee securities could help enhance transparency and spot financial troubles such as those that erupted in Detroit, said a public finance veteran who is advising that city in its post-bankruptcy recovery.
Tower prohibits the SEC and Municipal Securities Rulemaking Board from requiring issuers to directly or indirectly to file any information with them before selling bonds.
Former New York Lt. Gov. Richard Ravitch, whom Michigan Gov. Rick Snyder hired as senior financial advisor for Detroit's new financial review board, also suggested threatening states with the loss of tax-exemption on their municipal bonds if they don't require cities to balance budgets.
"We also have to pressure the bond industry to stop underwriting debt sold to balance operating budgets as opposed to making important investments in infrastructure and education," he said Tuesday at a public pension conference at the University of Pennsylvania's Penn Institute for Urban Research.
In Michigan, Ravitch will be a special liaison to the state, Snyder announced after calling Ravitch Monday night with the offer. Ravitch had advised U.S. Bankruptcy Judge Steven Rhodes during the Detroit bankruptcy trial. Rhodes last Friday approved an exit plan that concluded the largest U.S. bankruptcy ever, which lasted 16 months.
Ravitch advised New York City as it emerged from its 1975 financial crisis. He also chaired the Metropolitan Transportation Authority, which operates the city's subway system and two commuter rail lines, from 1979 to 1982.
States, he said, should require cities to budget under generally accepted accounting principles, a move that improved New York's standing in the bond markets.
"In Detroit, nobody did a damn thing over 50 years while they built up $18 billion of debt without a snowball's chance in hell to pay it," Ravitch said at the Van Pelt-Dietrich Library Center. "The state of Michigan paid no attention."
Detroit filed for bankruptcy in July 2013. Ravitch was an unpaid financial advisor during the bankruptcy filing.
"Can the city recover? Will people move back into that city? Will the city grow again? Those are interesting questions," Ravitch said. "The bankruptcy was the price they paid for neglecting the problems. It should be a lesson for everyone."
Ravitch defended the so-called "grand bargain," in which state and foundation money backstopped Detroit's pensions in return for keeping the city's art collection. "The city of Detroit and the state of Michigan considered art and the art museum a very valuable asset, and therefore selling the art would not be a good way of encouraging people to move into Detroit and invest in Detroit."
Bankruptcy expert James Spiotto, a managing director at Chapman Strategic Advisors LLC, said establishing public pension funding authorities would assist transparency and disclosure.
"We need to get everyone on the same page," he said. "It's been said that the relationship between elected officials and public-sector employees resembles some sort of stupid suicide pact, and it isn't."
Spiotto urged investments in distressed municipalities' infrastructure and vital assets to help turn them around. "Reducing debt gives you more runway," he said. "It doesn't solve the problem."
While Detroit retirees only realized 4.5% cuts to their pension benefits under their recovery plan, as opposed to original projections of up to 26% to 34%, Spiotto warned that trouble could loom in 2023, when the city must resume pension payments. "Yes, it's only 4-1/2%, but the workers are taking a real gamble. It's their investment."
