Detroit Mayor Mike Duggan failed to persuade the City Council to advance a $250 million bond proposal he said would put an end to blight in the city and free up funds for upcoming pension bond payments.
The council on Tuesday voted down the proposal on a 6-3 vote, citing concerns about whether it was the best way to use city funds. The skepticism was underscored by a city
The Duggan administration wanted to issue the debt as part of an up to $500 million effort to raze all of Detroit's abandoned homes by mid-2025 — within five years, according to the administration, instead of the 13 it would take to do the job using only general fund dollars. Duggan’s administration first unveiled the bonding proposal in September.
City Councilwoman Raquel Castañeda-López said that a "no" vote doesn't preclude the city from bringing another blight bond proposal at a later date.
“This is not our only opportunity to do this. We have an opportunity to push forward and put it forward in a better way," Castañeda-López said. “If the bond does not go forward, it does not mean that demolitions will stop in the city of Detroit there is still funding appropriated in the general fund to allow for demolitions to continue forward now it may not happen in a five-year time frame but demolitions will continue.”
Detroit Chief Financial Officer Dave Massaron has said postponing the ballot initiative until November would halt the city's progress with demolitions and it could mean a higher rates for the city if the municipal bond market shifts. He was not available for comment on Tuesday's council vote.
Duggan’s administration first unveiled the bond proposal in September. Voters would have been asked to authorize the junk-rated city to issue $250 million of new of new money, unlimited tax general obligation bonds.
The bonds would have been sold on the city’s own credit and would be repaid with an existing 9-mill property tax over about 30 years. Massaron has said the city's improved credit profile nearly five years since emerging from Chapter 9 municipal bankruptcy allows it to borrow. The city issued its
Howard Cure, director of municipal bond research for Evercore Wealth Management, said that issuing the blight bonds would mean that whatever money the city would be using to pay off debt service is money “that they aren’t going to use for other capital improvements or could put more pressure on funding pensions coming through.”
Rating agencies and municipal analysts have said a big scheduled spike in pension payments in 2024 is the most material credit pressure facing the city.
The 2014 plan of adjustment Detroit used to exit bankruptcy froze the city's legacy pension plans and provided an initial funding infusion from the so-called "grand bargain" funded with help from the state and private entities. The city received a funding holiday but payments resume in 2024.
The city is already putting aside money in a Retiree Protection Fund to meet an increase in pension payments of nearly $100 million more than initial post-bankruptcy estimates beginning in fiscal 2024. That fund is on track to grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then.
“Right now you are operating under a pretty strong national economy and there has been some development in the city downtown, but what happens if you have a confluence of events where they need to put the money in the pensions and the economy slows down?” Cure said. “I think there is investor caution on this but the city is entering the market at a pretty good time right now but we are talking a year away.”
Lisa Washburn, a managing director for Municipal Market Analytics, said Detroit has done a good job in building a reserve cushion but it remains vulnerable from a credit perspective.
“Issuing $250 million in debt will add to the projected rise in the city’s fixed costs reducing its flexibility to address unplanned spending or a decline in revenues and reasonably reduces its capacity to borrow for other capital investments,” Washburn said. “By issuing long-term bonds for blight removal, which is unusual itself, the city is making a choice not to invest in something else. It’s a trade-off that hopefully has been subject to careful consideration.”
Tanya Stoudemire, Duggan's deputy CFO and budget manager, told the city council last week that bonding for the blight funds would free up general fund revenues that could go to the city’s retirement fund.
“The dollars that we have available for our capital and blight and [the Retiree Protection Fund] are all coming from the same pot,” Stoudemire said. “What we are trying to with this bond proposal is trying to put that into a different pot so that we are not competing for those three things so that in the case that we might need additional dollars for RPF.”
Moody’s Investors Service rates Detroit's general obligation bonds Ba3, three notches below investment grade, and last upgraded the city nearly a year ago. S&P Global Ratings in February upgraded the city’s general obligation ratings to BB-minus — also three notches away from investment grade — from B-plus.
“Even with the increase of supply generally in the market that’s been able to be placed I still think there is demand for higher yielding paper,” Cure said. “Detroit has been managed pretty conservatively and their projection model thinks they can borrow a total of $675 million over ten years and this could fit into it but it’s a matter of convincing people that this is the best use of limited city debt capacity.”
The auditor general's report that found the Detroit Building Authority, which manages the demolition program, did not meet contract requirements or comply with city policies and procedures, state and other local rules. The report flagged multiple concerns over the administration of city-funded demolition work and cited unreliable data, a lack of documentation and other failures.
In response to city council concerns about possible mismanagement of bond funds, the city administration added to the bond resolution the creation of a demolition review board that would have three members selected by the council, three by administration and one joint appointment to review all demolition contracts and report on a quarterly basis to the council.
Massaron said the proposal would require the administration to first get permission from the city council before spending any bond money and would also precede bonding with a $50 million pilot program in January if the bonds were to make it onto the ballot.
“At the last meeting council president suggested that we have a pilot program of $50 million before we move forward with larger program,” Massaron said.
The Duggan administration said the bonding would not require an increase in taxes; it would be paid back through existing city revenues.
However presentations to city council over the past few weeks show that without the new bonds Detroit taxpayers would see the property tax millage rate drop to 6 mills from 9 mills in 2021. That means that the average homeowner would save $60 a year if the bonding isn’t passed.
State Rep. Sherry Gay-Dagnogo, D-Detroit, has also expressed concerns that Detroit taxpayers would be overwhelmed by the litany of millages expected on the ballot in 2020.
“There are no numbers on what the impact is to the city as it continues to make its way out of bankruptcy and there are no numbers on what the impact is of putting these things on the ballot simultaneously,” Gay-Dagnogo said.
