CHICAGO — Fitch Ratings blasted Michigan Gov. Rick Snyder's plan to pledge $350 million to Detroit pensioners, warning that it elevates pension claims above bond debt.
"Action that suggests pensions' claim on limited resources should be given priority to that of bondholders could establish a troubling precedent, at least in Michigan and perhaps beyond, given the paucity of significant municipal bankruptcy filings historically and the resulting focus on the Detroit case," Fitch analyst Amy Laskey said Monday in a comment on Snyder's plan.
"Moreover, the governor's comment that state funds will not bail out bondholders or Wall Street but are going to Michiganders suggests an us-versus-them orientation to debt repayment that undermines willingness to pay public debt in Michigan," she wrote.
Snyder made those comments last week when he unveiled a plan to pledge $350 million of state funds as part of a new proposal that would boost Detroit's pensions while protecting the city's art collection.
The Republican Snyder's plan, which is supported by top GOP lawmakers, offers the state funds as a match to $330 million already raised by a group of private foundations. The plan is to pledge the money to the city's unfunded pension liability to help protect the art collection from the threat of a sale. A detailed proposal is being hammered out with bankruptcy court mediators.
Fitch noted that Snyder's plan follows his support for Detroit emergency manager Kevyn Orr's decision to treat the city's unlimited- and limited-tax general obligation bonds as unsecured.
"Fitch has previously stated its concern for the lack of priority for GO debt," Laskey wrote. "Fitch recognizes the delicate political situation surrounding the Detroit bankruptcy. As the state and city continue down what could be a long road, actions and rhetoric that suggest bondholder rights are not an important consideration will continue to damage market perception of the state and its local governments."
A spokesman for Snyder defended the proposal in an email to the Bond Buyer.
"The $350 million settlement offer is not about bailouts or helping Wall Street and banks," spokesman Sara Wurfel said.
The email continued:
"It's about helping reduce and mitigate pension cuts and the impact on retirees, especially those most vulnerable. A settlement will help resolve the bankruptcy process faster, help ensure the city stays on its path to revitalization and save millions in taxpayer dollars - and would be in the best interest of Detroiters, Michiganders and others across the country. We are confident that if there can be a mediated resolution -- which Gov. Snyder has been and will continue to work hard to achieve -- that it will be part of a plan that can be approved by the bankruptcy court. Michigan is proud of and committed to its return to strong fiscal management with structurally sound and truly balanced budgets that also address long-term liabilities and strategically invest in priorities to build a strong foundation for the future."
Snyder's plan still has to be approved by lawmakers and U.S. Bankruptcy Judge Steven Rhodes.
If approved, the state would tap its annual tobacco settlement payments to raise the funds, according to Snyder. Michigan might issue a $350 million bond backed by the payments or divert a piece of the annual payments.
The deal is contingent on the money being used solely for Detroit pensioners, he said.
